Why It Might Not Make Sense To Buy VST Industries Limited (NSE:VSTIND) For Its Upcoming Dividend

It looks like VST Industries Limited (NSE:VSTIND) is about to go ex-dividend in the next three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, VST Industries investors that purchase the stock on or after the 3rd of July will not receive the dividend, which will be paid on the 22nd of August.

The company's next dividend payment will be ₹10.00 per share, and in the last 12 months, the company paid a total of ₹10.00 per share. Based on the last year's worth of payments, VST Industries stock has a trailing yield of around 3.4% on the current share price of ₹296.75. If you buy this business for its dividend, you should have an idea of whether VST Industries's dividend is reliable and sustainable. So we need to investigate whether VST Industries can afford its dividend, and if the dividend could grow.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. VST Industries is paying out an acceptable 58% of its profit, a common payout level among most companies. 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. VST Industries paid out more free cash flow than it generated - 151%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

VST Industries paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were VST Industries to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

View our latest analysis for VST Industries

Click here to see how much of its profit VST Industries paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that VST Industries's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, VST Industries has increased its dividend at approximately 4.6% a year on average.

To Sum It Up

Is VST Industries worth buying for its dividend? Earnings per share have not grown and VST Industries's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of VST Industries.

So if you're still interested in VST Industries despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 2 warning signs with VST Industries 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.