Why You Might Be Interested In Chennai Petroleum Corporation Limited (NSE:CHENNPETRO) For Its Upcoming Dividend

Chennai Petroleum Corporation Limited (NSE:CHENNPETRO) is about to trade ex-dividend in the next 2 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Chennai Petroleum's shares on or after the 19th of July, you won't be eligible to receive the dividend, when it is paid on the 6th of August.

The company's next dividend payment will be ₹55.00 per share, and in the last 12 months, the company paid a total of ₹55.00 per share. Last year's total dividend payments show that Chennai Petroleum has a trailing yield of 5.1% on the current share price of ₹1084.70. 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 investigate whether Chennai Petroleum can afford its dividend, and if the dividend could grow.

View our latest analysis for Chennai Petroleum

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. Fortunately Chennai Petroleum's payout ratio is modest, at just 30% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. What's good is that dividends were well covered by free cash flow, with the company paying out 19% of its cash flow last year.

It's positive to see that Chennai Petroleum'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.

Click here to see how much of its profit Chennai Petroleum 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Chennai Petroleum's earnings have been skyrocketing, up 63% per annum for the past five years. Chennai Petroleum is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Chennai Petroleum has delivered an average of 39% per year annual increase in its dividend, based on the past eight years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Is Chennai Petroleum an attractive dividend stock, or better left on the shelf? Chennai Petroleum has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past eight years, but the conservative payout ratio makes the current dividend look sustainable. Chennai Petroleum looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Chennai Petroleum for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 2 warning signs for Chennai Petroleum (of which 1 is concerning!) you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com