Honda India Power Products Limited (NSE:HONDAPOWER) Looks Like A Good Stock, And It's Going Ex-Dividend Soon

Honda India Power Products Limited (NSE:HONDAPOWER) stock is about to trade ex-dividend in 3 days. 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Honda India Power Products' shares before the 18th of February in order to receive the dividend, which the company will pay on the 10th of March.

The company's next dividend payment will be ₹10.00 per share, and in the last 12 months, the company paid a total of ₹17.50 per share. Last year's total dividend payments show that Honda India Power Products has a trailing yield of 0.8% on the current share price of ₹2261.40. 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 Honda India Power Products can afford its dividend, and if the dividend could grow.

See our latest analysis for Honda India Power Products

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Honda India Power Products paid out just 19% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Honda India Power Products generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 45% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that Honda India Power Products's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Honda India Power Products paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's not encouraging to see that Honda India Power Products's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Honda India Power Products has lifted its dividend by approximately 16% a year on average.

Final Takeaway

Should investors buy Honda India Power Products for the upcoming dividend? Earnings per share have been flat over this time, but we're intrigued to see that Honda India Power Products 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 strong earnings per share growth with a low payout ratio, and Honda India Power Products is halfway there. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Honda India Power Products has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 1 warning sign for Honda India Power Products that you should be aware of before investing in their shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.