Here's Why We're Wary Of Buying Munjal Auto Industries' (NSE:MUNJALAU) For Its Upcoming Dividend

Readers hoping to buy Munjal Auto Industries Limited (NSE:MUNJALAU) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Munjal Auto Industries' shares on or after the 25th of August, you won't be eligible to receive the dividend, when it is paid on the 1st of October.

The company's next dividend payment will be ₹2.00 per share, on the back of last year when the company paid a total of ₹2.00 to shareholders. Calculating the last year's worth of payments shows that Munjal Auto Industries has a trailing yield of 3.4% on the current share price of ₹59.35. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Munjal Auto Industries can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Munjal Auto Industries

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Munjal Auto Industries's payout ratio is modest, at just 36% of profit. A useful secondary check can be to evaluate whether Munjal Auto Industries generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 251% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While Munjal Auto Industries's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Munjal Auto Industries's ability to maintain its dividend.

Click here to see how much of its profit Munjal Auto Industries paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Munjal Auto Industries's 13% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Munjal Auto Industries has delivered 7.2% dividend growth per year on average over the past 10 years.

To Sum It Up

Should investors buy Munjal Auto Industries for the upcoming dividend? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Munjal Auto Industries is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Munjal Auto Industries. To help with this, we've discovered 5 warning signs for Munjal Auto Industries (1 is a bit concerning!) that you ought to be aware of before buying the shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.