Don't Race Out To Buy Kewal Kiran Clothing Limited (NSE:KKCL) Just Because It's Going Ex-Dividend

Kewal Kiran Clothing Limited (NSE:KKCL) stock is about to trade ex-dividend in three days. You can purchase shares before the 3rd of February in order to receive the dividend, which the company will pay on the 21st of February.

Kewal Kiran Clothing's next dividend payment will be ₹8.00 per share, on the back of last year when the company paid a total of ₹16.00 to shareholders. Last year's total dividend payments show that Kewal Kiran Clothing has a trailing yield of 1.8% on the current share price of ₹886.05. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Kewal Kiran Clothing has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Kewal Kiran Clothing

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. Kewal Kiran Clothing distributed an unsustainably high 137% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Kewal Kiran Clothing paid out more free cash flow than it generated - 118%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Kewal Kiran Clothing 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.

As Kewal Kiran Clothing's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Kewal Kiran Clothing's 16% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Kewal Kiran Clothing has delivered an average of 10% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Kewal Kiran Clothing is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Kewal Kiran Clothing got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Kewal Kiran Clothing is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Bottom line: Kewal Kiran Clothing has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Kewal Kiran Clothing and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 3 warning signs for Kewal Kiran Clothing that you should be aware of before investing in their shares.

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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