Don't Buy Clariant Chemicals (India) Limited (NSE:CLNINDIA) For Its Next Dividend Without Doing These Checks

It looks like Clariant Chemicals (India) Limited (NSE:CLNINDIA) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 17th of August will not receive this dividend, which will be paid on the 19th of September.

Clariant Chemicals (India)'s upcoming dividend is ₹11.00 a share, following on from the last 12 months, when the company distributed a total of ₹11.00 per share to shareholders. Based on the last year's worth of payments, Clariant Chemicals (India) stock has a trailing yield of around 2.7% on the current share price of ₹405.45. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Clariant Chemicals (India)

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. Clariant Chemicals (India) distributed an unsustainably high 137% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Clariant Chemicals (India) fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Clariant Chemicals (India) paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Clariant Chemicals (India)'s earnings per share have plummeted approximately 53% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Clariant Chemicals (India)'s dividend payments per share have declined at 9.5% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

From a dividend perspective, should investors buy or avoid Clariant Chemicals (India)? It's never great to see earnings per share declining, especially when a company is paying out 137% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Clariant Chemicals (India)'s cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Clariant Chemicals (India) as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 3 warning signs for Clariant Chemicals (India) (of which 1 makes us a bit uncomfortable!) you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top 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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