Amara Raja Energy & Mobility Limited (NSE:ARE&M) Passed Our Checks, And It's About To Pay A ₹5.10 Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Amara Raja Energy & Mobility Limited (NSE:ARE&M) is about to go ex-dividend in just 3 days. The ex-dividend date is one business day 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, Amara Raja Energy & Mobility investors that purchase the stock on or after the 18th of July will not receive the dividend, which will be paid on the 2nd of September.

The company's upcoming dividend is ₹5.10 a share, following on from the last 12 months, when the company distributed a total of ₹10.20 per share to shareholders. Looking at the last 12 months of distributions, Amara Raja Energy & Mobility has a trailing yield of approximately 0.6% on its current stock price of ₹1615.75. If you buy this business for its dividend, you should have an idea of whether Amara Raja Energy & Mobility's dividend is reliable and sustainable. As a result, readers should always check whether Amara Raja Energy & Mobility has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Amara Raja Energy & Mobility

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Amara Raja Energy & Mobility paid out just 19% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 35% of the free cash flow it generated, which is a comfortable payout ratio.

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 the company's payout ratio, plus analyst estimates of its future dividends.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Amara Raja Energy & Mobility's earnings per share have risen 13% per annum over the last five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Amara Raja Energy & Mobility has lifted its dividend by approximately 12% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Has Amara Raja Energy & Mobility got what it takes to maintain its dividend payments? It's great that Amara Raja Energy & Mobility is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.

While it's tempting to invest in Amara Raja Energy & Mobility for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 3 warning signs for Amara Raja Energy & Mobility that we strongly recommend you have a look at before investing in the company.

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

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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.

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