Should You Buy The United Nilgiri Tea Estates Company Limited (NSE:UNITEDTEA) For Its Upcoming Dividend?

The United Nilgiri Tea Estates Company Limited (NSE:UNITEDTEA) is about to trade ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 25th of March will not receive this dividend, which will be paid on the 15th of April.

United Nilgiri Tea Estates's next dividend payment will be ₹1.00 per share, and in the last 12 months, the company paid a total of ₹2.70 per share. Based on the last year's worth of payments, United Nilgiri Tea Estates stock has a trailing yield of around 0.9% on the current share price of ₹300.7. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for United Nilgiri Tea Estates

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. United Nilgiri Tea Estates has a low and conservative payout ratio of just 6.7% of its income after tax. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 6.5% of its free cash flow as dividends last year, which is conservatively low.

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 how much of its profit United Nilgiri Tea Estates paid out over the last 12 months.

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 fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see United Nilgiri Tea Estates earnings per share are up 7.8% per annum over the last five years. Earnings per share have been growing at a decent rate, and the company is retaining more than three-quarters of its earnings in the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last nine years, United Nilgiri Tea Estates has lifted its dividend by approximately 2.0% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Is United Nilgiri Tea Estates worth buying for its dividend? Earnings per share growth has been growing somewhat, and United Nilgiri Tea Estates is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but United Nilgiri Tea Estates is being conservative with its dividend payouts and could still perform reasonably over the long run. Overall we think this is an attractive combination and worthy of further research.

On that note, you'll want to research what risks United Nilgiri Tea Estates is facing. To help with this, we've discovered 2 warning signs for United Nilgiri Tea Estates that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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