Don't Buy Hindustan Unilever Limited (NSE:HINDUNILVR) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Hindustan Unilever Limited (NSE:HINDUNILVR) is about to trade ex-dividend in the next 3 days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order 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. Thus, you can purchase Hindustan Unilever's shares before the 23rd of June in order to receive the dividend, which the company will pay on the 30th of July.

The company's next dividend payment will be ₹24.00 per share, on the back of last year when the company paid a total of ₹43.00 to shareholders. Based on the last year's worth of payments, Hindustan Unilever has a trailing yield of 1.9% on the current stock price of ₹2297.30. If you buy this business for its dividend, you should have an idea of whether Hindustan Unilever's dividend is reliable and sustainable. As a result, readers should always check whether Hindustan Unilever has been able to grow its dividends, or if the dividend might be cut.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Hindustan Unilever paid out 95% 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. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 117% of its free cash flow as dividends, which is uncomfortably 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.

Cash is slightly more important than profit from a dividend perspective, but given Hindustan Unilever's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

See our latest analysis for Hindustan Unilever

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Hindustan Unilever, with earnings per share up 7.7% 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Hindustan Unilever has delivered 12% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Hindustan Unilever? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Hindustan Unilever. In terms of investment risks, we've identified 1 warning sign with Hindustan Unilever and understanding them should be part of your investment process.

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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.