Dividend Investors: Don't Be Too Quick To Buy Colgate-Palmolive (India) Limited (NSE:COLPAL) For Its Upcoming Dividend

Readers hoping to buy Colgate-Palmolive (India) Limited (NSE:COLPAL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Meaning, you will need to purchase Colgate-Palmolive (India)'s shares before the 4th of November to receive the dividend, which will be paid on the 21st of November.

The company's next dividend payment will be ₹24.00 per share, and in the last 12 months, the company paid a total of ₹52.00 per share. Based on the last year's worth of payments, Colgate-Palmolive (India) stock has a trailing yield of around 1.7% on the current share price of ₹3091.15. If you buy this business for its dividend, you should have an idea of whether Colgate-Palmolive (India)'s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Colgate-Palmolive (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. Last year, Colgate-Palmolive (India) paid out 93% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Colgate-Palmolive (India) generated enough free cash flow to afford its dividend. Colgate-Palmolive (India) paid out more free cash flow than it generated - 129%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Colgate-Palmolive (India)'s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Colgate-Palmolive (India)'s earnings per share have risen 14% per annum over the last five years. We're a bit put out by the fact that Colgate-Palmolive (India) paid out virtually all of its earnings and cashflow as dividends over the last year. Earnings are growing at a decent clip, so this payout ratio may prove sustainable, but it's not great to see.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Colgate-Palmolive (India) has delivered 14% dividend growth per year on average over the past 10 years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

Is Colgate-Palmolive (India) worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Colgate-Palmolive (India) and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 2 warning signs with Colgate-Palmolive (India) 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.