Read This Before Considering DCM Shriram Limited (NSE:DCMSHRIRAM) For Its Upcoming ₹3.40 Dividend

It looks like DCM Shriram Limited (NSE:DCMSHRIRAM) is about to go ex-dividend in the next three 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. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase DCM Shriram's shares before the 5th of August to receive the dividend, which will be paid on the 11th of September.

The company's next dividend payment will be ₹3.40 per share, and in the last 12 months, the company paid a total of ₹9.00 per share. Last year's total dividend payments show that DCM Shriram has a trailing yield of 0.6% on the current share price of ₹1429.60. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. DCM Shriram has a low and conservative payout ratio of just 23% of its income after tax. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 48% of its free cash flow as dividends, a comfortable payout level for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Check out our latest analysis for DCM Shriram

Click here to see how much of its profit DCM Shriram paid out over the last 12 months.

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. So we're not too excited that DCM Shriram's earnings are down 3.4% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. DCM Shriram has delivered 9.6% dividend growth per year on average over the past 10 years.

The Bottom Line

Has DCM Shriram got what it takes to maintain its dividend payments? DCM Shriram has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of DCM Shriram's dividend merits.

So while DCM Shriram looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Be aware that DCM Shriram is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.