Don't Race Out To Buy Emami Limited (NSE:EMAMILTD) Just Because It's Going Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Emami Limited (NSE:EMAMILTD) is about to go ex-dividend in just 3 days. You will need to purchase shares before the 4th of February to receive the dividend, which will be paid on the 26th of February.

Emami's next dividend payment will be ₹4.00 per share, on the back of last year when the company paid a total of ₹8.00 to shareholders. Based on the last year's worth of payments, Emami has a trailing yield of 1.7% on the current stock price of ₹483.05. If you buy this business for its dividend, you should have an idea of whether Emami's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Emami

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Emami paid out 92% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (58%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Emami's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see Emami's earnings per share have been shrinking at 4.0% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Emami has increased its dividend at approximately 23% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Emami is already paying out 92% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Should investors buy Emami for the upcoming dividend? It's never fun to see a company's earnings per share in retreat. Worse, Emami's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Emami as an investment, you'll find it beneficial to know what risks this stock is facing. In terms of investment risks, we've identified 2 warning signs with Emami and understanding them should be part of your investment process.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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