Is It Smart To Buy The Indian Hotels Company Limited (NSE:INDHOTEL) Before It Goes Ex-Dividend?

The Indian Hotels Company Limited (NSE:INDHOTEL) stock is about to trade ex-dividend in 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 Indian Hotels' shares before the 7th of June to receive the dividend, which will be paid on the 14th of July.

The company's upcoming dividend is ₹1.75 a share, following on from the last 12 months, when the company distributed a total of ₹1.75 per share to shareholders. Last year's total dividend payments show that Indian Hotels has a trailing yield of 0.3% on the current share price of ₹557.40. If you buy this business for its dividend, you should have an idea of whether Indian Hotels's dividend is reliable and sustainable. So we need to investigate whether Indian Hotels can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Indian Hotels

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Indian Hotels has a low and conservative payout ratio of just 20% of its income after tax. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 12% of its cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Indian Hotels's earnings have been skyrocketing, up 30% per annum for the past five years. Indian Hotels looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Indian Hotels has delivered an average of 25% per year annual increase in its dividend, based on the past eight years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Has Indian Hotels got what it takes to maintain its dividend payments? It's great that Indian Hotels is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. In terms of investment risks, we've identified 1 warning sign with Indian Hotels and understanding them should be part of your investment process.

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.