Why It Might Not Make Sense To Buy Monte Carlo Fashions Limited (NSE:MONTECARLO) For Its Upcoming Dividend

Monte Carlo Fashions Limited (NSE:MONTECARLO) is about to trade ex-dividend in the next three days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase Monte Carlo Fashions' shares on or after the 22nd of September will not receive the dividend, which will be paid on the 29th of October.

The company's next dividend payment will be ₹20.00 per share, and in the last 12 months, the company paid a total of ₹20.00 per share. Last year's total dividend payments show that Monte Carlo Fashions has a trailing yield of 3.0% on the current share price of ₹661.50. 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 Monte Carlo Fashions has been able to grow its dividends, or if the dividend might be cut.

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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. Monte Carlo Fashions is paying out an acceptable 51% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Monte Carlo Fashions generated enough free cash flow to afford its dividend. Over the past year it paid out 119% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Monte Carlo Fashions paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Monte Carlo Fashions to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

See our latest analysis for Monte Carlo Fashions

Click here to see how much of its profit Monte Carlo Fashions 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 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 Monte Carlo Fashions earnings per share are up 4.5% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Monte Carlo Fashions has lifted its dividend by approximately 7.2% a year on average. 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

Has Monte Carlo Fashions got what it takes to maintain its dividend payments? Earnings per share have grown somewhat, although Monte Carlo Fashions paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Monte Carlo Fashions don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Monte Carlo Fashions is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.