Should Income Investors Look At Amara Raja Batteries Limited (NSE:AMARAJABAT) Before Its Ex-Dividend?

It looks like Amara Raja Batteries Limited (NSE:AMARAJABAT) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 25th of February will not receive this dividend, which will be paid on the 15th of March.

Amara Raja Batteries's upcoming dividend is ₹5.00 a share, following on from the last 12 months, when the company distributed a total of ₹10.00 per share to shareholders. Calculating the last year's worth of payments shows that Amara Raja Batteries has a trailing yield of 1.1% on the current share price of ₹877.55. 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 Amara Raja Batteries can afford its dividend, and if the dividend could grow.

View our latest analysis for Amara Raja Batteries

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Amara Raja Batteries paid out just 14% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 85% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

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.

Click here to see how much of its profit Amara Raja Batteries paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Amara Raja Batteries earnings per share are up 7.7% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Amara Raja Batteries has delivered an average of 21% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Should investors buy Amara Raja Batteries for the upcoming dividend? Earnings per share growth has been modest, and it's interesting that Amara Raja Batteries is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. In summary, while it has some positive characteristics, we're not inclined to race out and buy Amara Raja Batteries today.

Curious about whether Amara Raja Batteries has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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