Should Income Investors Look At Reliance Industries Limited (NSE:RELIANCE) Before Its Ex-Dividend?

Reliance Industries Limited (NSE:RELIANCE) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Accordingly, Reliance Industries investors that purchase the stock on or after the 19th of August will not receive the dividend, which will be paid on the 28th of September.

The company's next dividend payment will be ₹10.00 per share, on the back of last year when the company paid a total of ₹10.00 to shareholders. Calculating the last year's worth of payments shows that Reliance Industries has a trailing yield of 0.3% on the current share price of ₹2927.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Reliance Industries

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Reliance Industries is paying out just 9.7% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. The company paid out 103% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Reliance Industries paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Reliance Industries's ability to maintain its dividend.

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. With that in mind, we're encouraged by the steady growth at Reliance Industries, with earnings per share up 8.7% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Reliance Industries has delivered an average of 7.7% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Reliance Industries an attractive dividend stock, or better left on the shelf? Reliance Industries delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 103% of its cash flow over the last year, which is a mediocre outcome. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

With that being said, if dividends aren't your biggest concern with Reliance Industries, you should know about the other risks facing this business. To help with this, we've discovered 1 warning sign for Reliance Industries that you should be aware of before investing in their shares.

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.