Dividend Investors: Don't Be Too Quick To Buy Aptech Limited (NSE:APTECHT) For Its Upcoming Dividend

Aptech Limited (NSE:APTECHT) is about to trade ex-dividend in the next 2 days. Typically, the ex-dividend date is two business days 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 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 Aptech's shares on or after the 16th of May will not receive the dividend, which will be paid on the 7th of June.

The company's next dividend payment will be ₹4.50 per share, and in the last 12 months, the company paid a total of ₹4.50 per share. Based on the last year's worth of payments, Aptech has a trailing yield of 2.7% on the current stock price of ₹167.01. If you buy this business for its dividend, you should have an idea of whether Aptech's dividend is reliable and sustainable. As a result, readers should always check whether Aptech 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. Its dividend payout ratio is 90% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Aptech generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 202% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While Aptech's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Aptech's ability to maintain its dividend.

See our latest analysis for Aptech

Click here to see how much of its profit Aptech paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Aptech's 5.5% 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. Aptech has delivered an average of 3.4% 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. Aptech is already paying out 90% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Has Aptech got what it takes to maintain its dividend payments? Aptech had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: Aptech has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Aptech and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 3 warning signs for Aptech (1 is concerning) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.