Income Investors Should Know That Nestlé India Limited (NSE:NESTLEIND) Goes Ex-Dividend Soon

Nestlé India Limited (NSE:NESTLEIND) stock is about to trade ex-dividend in two days. The ex-dividend date occurs one day 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Nestlé India's shares on or after the 7th of February, you won't be eligible to receive the dividend, when it is paid on the 2nd of March.

The company's next dividend payment will be ₹14.25 per share, and in the last 12 months, the company paid a total of ₹29.50 per share. Based on the last year's worth of payments, Nestlé India stock has a trailing yield of around 1.3% on the current share price of ₹2317.10. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Nestlé India

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. Its dividend payout ratio is 78% 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 concerned if earnings began to decline. 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. It paid out an unsustainably high 281% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Nestlé India intends to continue funding this dividend, or if it could be forced to cut the payment.

While Nestlé India'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. Cash is king, as they say, and were Nestlé India to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

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. For this reason, we're glad to see Nestlé India's earnings per share have risen 15% per annum over the last five years. Earnings have been growing at a decent 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. Since the start of our data, 10 years ago, Nestlé India has lifted its dividend by approximately 20% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

Is Nestlé India worth buying for its dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Nestlé India paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, while it has some positive characteristics, we're not inclined to race out and buy Nestlé India today.

However if you're still interested in Nestlé India as a potential investment, you should definitely consider some of the risks involved with Nestlé India. To help with this, we've discovered 1 warning sign for Nestlé India that you should be aware of before investing in their shares.

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.