Only Three Days Left To Cash In On Mazagon Dock Shipbuilders' (NSE:MAZDOCK) Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Mazagon Dock Shipbuilders Limited (NSE:MAZDOCK) is about to trade ex-dividend in the next three 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 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. Meaning, you will need to purchase Mazagon Dock Shipbuilders' shares before the 19th of September to receive the dividend, which will be paid on the 26th of October.

The company's next dividend payment will be ₹12.11 per share, on the back of last year when the company paid a total of ₹27.45 to shareholders. Based on the last year's worth of payments, Mazagon Dock Shipbuilders has a trailing yield of 0.6% on the current stock price of ₹4312.80. If you buy this business for its dividend, you should have an idea of whether Mazagon Dock Shipbuilders's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Mazagon Dock Shipbuilders

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Mazagon Dock Shipbuilders paid out a comfortable 29% of its profit last year. A useful secondary check can be to evaluate whether Mazagon Dock Shipbuilders generated enough free cash flow to afford its dividend. Over the past year it paid out 185% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Mazagon Dock Shipbuilders does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Mazagon Dock Shipbuilders paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Mazagon Dock Shipbuilders's ability to maintain its dividend.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Mazagon Dock Shipbuilders has grown its earnings rapidly, up 37% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, four years ago, Mazagon Dock Shipbuilders has lifted its dividend by approximately 26% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Is Mazagon Dock Shipbuilders worth buying for its dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall, it's hard to get excited about Mazagon Dock Shipbuilders from a dividend perspective.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Be aware that Mazagon Dock Shipbuilders is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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