Here's Why We're Wary Of Buying Godrej Consumer Products' (NSE:GODREJCP) For Its Upcoming Dividend

It looks like Godrej Consumer Products Limited (NSE:GODREJCP) is about to go ex-dividend in the next 3 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Godrej Consumer Products' shares on or after the 13th of May will not receive the dividend, which will be paid on the 5th of June.

The company's upcoming dividend is ₹5.00 a share, following on from the last 12 months, when the company distributed a total of ₹15.00 per share to shareholders. Looking at the last 12 months of distributions, Godrej Consumer Products has a trailing yield of approximately 1.2% on its current stock price of ₹1240.60. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Godrej Consumer Products can afford its dividend, and if the dividend could grow.

We've discovered 1 warning sign about Godrej Consumer Products. View them for free.

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. Godrej Consumer Products's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Godrej Consumer Products didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Thankfully its dividend payments took up just 30% of the free cash flow it generated, which is a comfortable payout ratio.

View our latest analysis for Godrej Consumer Products

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Godrej Consumer Products reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Godrej Consumer Products has lifted its dividend by approximately 23% a year on average.

Get our latest analysis on Godrej Consumer Products's balance sheet health here.

The Bottom Line

Should investors buy Godrej Consumer Products for the upcoming dividend? It's hard to get used to Godrej Consumer Products paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Godrej Consumer Products despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 1 warning sign for Godrej Consumer Products and you should be aware of this before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.