Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Century Enka Limited (NSE:CENTENKA) is about to trade ex-dividend in the next 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 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. Meaning, you will need to purchase Century Enka's shares before the 30th of July to receive the dividend, which will be paid on the 12th of September.
The company's next dividend payment will be ₹8.00 per share. Last year, in total, the company distributed ₹8.00 to shareholders. Based on the last year's worth of payments, Century Enka has a trailing yield of 1.8% on the current stock price of ₹434. 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 check whether the dividend payments are covered, and if earnings are growing.
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. Century Enka has a low and conservative payout ratio of just 25% of its income after tax. A useful secondary check can be to evaluate whether Century Enka generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 18% of its cash flow last year.
It's positive to see that Century Enka'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.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Century Enka earnings per share are up 3.7% per annum over the last five years. Century Enka is retaining more than three-quarters of its earnings and has a history of generating some growth in earnings. We think this is a reasonable combination.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Century Enka has delivered an average of 2.1% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Should investors buy Century Enka for the upcoming dividend? Earnings per share have been growing moderately, and Century Enka is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Century Enka is being conservative with its dividend payouts and could still perform reasonably over the long run. It's a promising combination that should mark this company worthy of closer attention.
On that note, you'll want to research what risks Century Enka is facing. We've identified 2 warning signs with Century Enka (at least 1 which is concerning), and understanding these should be part of your investment process.
If you're in the market for dividend stocks, we recommend checking our list of top 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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