Don't Buy Colgate-Palmolive (India) Limited (NSE:COLPAL) For Its Next Dividend Without Doing These Checks

It looks like Colgate-Palmolive (India) Limited (NSE:COLPAL) is about to go ex-dividend in the next 2 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase Colgate-Palmolive (India)'s shares on or after the 19th of May will not receive the dividend, which will be paid on the 11th of June.

The company's upcoming dividend is ₹21.00 a share, following on from the last 12 months, when the company distributed a total of ₹39.00 per share to shareholders. Looking at the last 12 months of distributions, Colgate-Palmolive (India) has a trailing yield of approximately 2.3% on its current stock price of ₹1673.65. 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! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Colgate-Palmolive (India)

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Colgate-Palmolive (India) paid out 101% 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. The company paid out 96% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Cash is slightly more important than profit from a dividend perspective, but given Colgate-Palmolive (India)'s payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see how much of its profit Colgate-Palmolive (India) paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 Colgate-Palmolive (India), with earnings per share up 9.2% on average over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.

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, Colgate-Palmolive (India) has lifted its dividend by approximately 12% a year on average. 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.

The Bottom Line

Should investors buy Colgate-Palmolive (India) for the upcoming dividend? Colgate-Palmolive (India) is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Colgate-Palmolive (India).

So if you're still interested in Colgate-Palmolive (India) 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 1 warning sign 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.