We Wouldn't Be Too Quick To Buy Godrej Consumer Products Limited (NSE:GODREJCP) Before It Goes Ex-Dividend

Godrej Consumer Products Limited (NSE:GODREJCP) is about to trade ex-dividend in the next four 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Godrej Consumer Products' shares on or after the 16th of August will not receive the dividend, which will be paid on the 6th of September.

The company's upcoming dividend is ₹5.00 a share, following on from the last 12 months, when the company distributed a total of ₹10.00 per share to shareholders. Calculating the last year's worth of payments shows that Godrej Consumer Products has a trailing yield of 0.7% on the current share price of ₹1444.80. If you buy this business for its dividend, you should have an idea of whether Godrej Consumer Products's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Godrej Consumer Products

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Godrej Consumer Products reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. 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 cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It distributed 29% of its free cash flow as dividends, a comfortable payout level for most companies.

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 was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Godrej Consumer Products has delivered 19% dividend growth per year on average over the past 10 years.

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

To Sum It Up

Is Godrej Consumer Products an attractive dividend stock, or better left on the shelf? 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 that we think Godrej Consumer Products is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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. To help with this, we've discovered 1 warning sign for Godrej Consumer Products that you should be aware of before investing in their shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.