Why It Might Not Make Sense To Buy Shanthi Gears Limited (NSE:SHANTIGEAR) For Its Upcoming 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 Shanthi Gears Limited (NSE:SHANTIGEAR) is about to go ex-dividend in just three days. Ex-dividend means that investors that purchase the stock on or after the 22nd of February will not receive this dividend, which will be paid on the 12th of March.

Shanthi Gears's next dividend payment will be ₹1.50 per share. Last year, in total, the company distributed ₹1.50 to shareholders. Looking at the last 12 months of distributions, Shanthi Gears has a trailing yield of approximately 1.2% on its current stock price of ₹122.35. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Shanthi Gears

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Shanthi Gears paid out 96% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. It paid out more than half (74%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Shanthi Gears's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Shanthi Gears, with earnings per share up 6.6% on average over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Shanthi Gears has lifted its dividend by approximately 6.5% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Shanthi Gears an attractive dividend stock, or better left on the shelf? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Shanthi Gears as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 2 warning signs for Shanthi Gears you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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