Should You Buy Precision Camshafts Limited (NSE:PRECAM) For Its Upcoming Dividend?

Readers hoping to buy Precision Camshafts Limited (NSE:PRECAM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Precision Camshafts investors that purchase the stock on or after the 23rd of July will not receive the dividend, which will be paid on the 29th of August.

The company's next dividend payment will be ₹1.00 per share, on the back of last year when the company paid a total of ₹1.00 to shareholders. Calculating the last year's worth of payments shows that Precision Camshafts has a trailing yield of 0.5% on the current share price of ₹201.23. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Precision Camshafts can afford its dividend, and if the dividend could grow.

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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. Precision Camshafts has a low and conservative payout ratio of just 18% of its income after tax. A useful secondary check can be to evaluate whether Precision Camshafts generated enough free cash flow to afford its dividend. Luckily it paid out just 11% of its free cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

See our latest analysis for Precision Camshafts

Click here to see how much of its profit Precision Camshafts paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Precision Camshafts, with earnings per share up 8.9% on average over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Precision Camshafts's dividend payments are broadly unchanged compared to where they were nine years ago.

The Bottom Line

From a dividend perspective, should investors buy or avoid Precision Camshafts? Earnings per share growth has been growing somewhat, and Precision Camshafts is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Precision Camshafts is halfway there. Precision Camshafts looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

So while Precision Camshafts looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. In terms of investment risks, we've identified 1 warning sign with Precision Camshafts and understanding them should be part of your investment process.

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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.