Here's What We Like About Precision Wires India's (NSE:PRECWIRE) Upcoming Dividend

It looks like Precision Wires India Limited (NSE:PRECWIRE) is about to go ex-dividend in the next 3 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. 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. This means that investors who purchase Precision Wires India's shares on or after the 25th of July will not receive the dividend, which will be paid on the 8th of September.

The company's next dividend payment will be ₹0.50 per share. Last year, in total, the company distributed ₹1.10 to shareholders. Calculating the last year's worth of payments shows that Precision Wires India has a trailing yield of 0.6% on the current share price of ₹190.93. If you buy this business for its dividend, you should have an idea of whether Precision Wires India's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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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. Precision Wires India has a low and conservative payout ratio of just 23% of its income after tax. 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. Fortunately, it paid out only 30% of its free cash flow in the past year.

It's positive to see that Precision Wires India'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.

See our latest analysis for Precision Wires India

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Precision Wires India has grown its earnings rapidly, up 22% a year for the past five years. Precision Wires India is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Precision Wires India has delivered 5.6% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because Precision Wires India is keeping back more of its profits to grow the business.

The Bottom Line

From a dividend perspective, should investors buy or avoid Precision Wires India? Precision Wires India has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Precision Wires India for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with Precision Wires India and understanding them should be part of your investment process.

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.