Is It Smart To Buy Shanthi Gears Limited (NSE:SHANTIGEAR) Before It Goes Ex-Dividend?

Shanthi Gears Limited (NSE:SHANTIGEAR) is about to trade ex-dividend in the next 3 days. The ex-dividend date is commonly two business days 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Shanthi Gears' shares on or after the 18th of July will not receive the dividend, which will be paid on the 27th of August.

The company's upcoming dividend is ₹2.00 a share, following on from the last 12 months, when the company distributed a total of ₹5.00 per share to shareholders. Last year's total dividend payments show that Shanthi Gears has a trailing yield of 1.0% on the current share price of ₹518.95. If you buy this business for its dividend, you should have an idea of whether Shanthi Gears'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. That's why it's good to see Shanthi Gears paying out a modest 40% of its earnings. 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. Dividends consumed 58% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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.

See our latest analysis for Shanthi Gears

Click here to see how much of its profit Shanthi Gears 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. That's why it's comforting to see Shanthi Gears's earnings have been skyrocketing, up 31% per annum for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Shanthi Gears has lifted its dividend by approximately 26% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Should investors buy Shanthi Gears for the upcoming dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Shanthi Gears paid out less than half its earnings and a bit over half its free cash flow. Shanthi Gears looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Shanthi Gears 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 Shanthi Gears and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.