Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Gujarat State Fertilizers & Chemicals Limited (NSE:GSFC) is about to trade 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Gujarat State Fertilizers & Chemicals' shares before the 8th of September in order to receive the dividend, which the company will pay on the 27th of October.
The company's upcoming dividend is ₹2.20 a share, following on from the last 12 months, when the company distributed a total of ₹2.20 per share to shareholders. Last year's total dividend payments show that Gujarat State Fertilizers & Chemicals has a trailing yield of 2.1% on the current share price of ₹105.3. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Gujarat State Fertilizers & Chemicals paid out just 16% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. It paid out 2.9% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Gujarat State Fertilizers & Chemicals'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.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Gujarat State Fertilizers & Chemicals, with earnings per share up 6.0% on average over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. If profits are reinvested effectively, this could be a bullish combination for future earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Gujarat State Fertilizers & Chemicals has increased its dividend at approximately 4.6% a year on average. 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
Is Gujarat State Fertilizers & Chemicals an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Gujarat State Fertilizers & Chemicals 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. It might be nice to see earnings growing faster, but Gujarat State Fertilizers & Chemicals is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Gujarat State Fertilizers & Chemicals, and we would prioritise taking a closer look at it.
While it's tempting to invest in Gujarat State Fertilizers & Chemicals for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 1 warning sign for Gujarat State Fertilizers & Chemicals and you should be aware of this before buying any shares.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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. 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.
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