Ambuja Cements (NSE:AMBUJACEM) Could Be A Buy For Its Upcoming Dividend

It looks like Ambuja Cements Limited (NSE:AMBUJACEM) is about to go ex-dividend in the next three 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 as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Ambuja Cements' shares on or after the 14th of June will not receive the dividend, which will be paid on the 26th of July.

The company's next dividend payment will be ₹2.00 per share, on the back of last year when the company paid a total of ₹2.00 to shareholders. Based on the last year's worth of payments, Ambuja Cements has a trailing yield of 0.3% on the current stock price of ₹621.30. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Ambuja Cements

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Ambuja Cements paid out just 11% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Ambuja Cements's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Ambuja Cements earnings per share are up 4.8% per annum over the last five years. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Ambuja Cements has seen its dividend decline 5.7% per annum on average over the past 10 years, which is not great to see. Ambuja Cements is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is Ambuja Cements an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Ambuja Cements is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Ambuja Cements is halfway there. Ambuja Cements looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Ambuja Cements for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 2 warning signs for Ambuja Cements that you should be aware of before investing in their shares.

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.