It Might Not Be A Great Idea To Buy HeidelbergCement India Limited (NSE:HEIDELBERG) For Its Next Dividend

HeidelbergCement India Limited (NSE:HEIDELBERG) stock is about to trade ex-dividend in three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase HeidelbergCement India's shares before the 12th of September in order to receive the dividend, which the company will pay on the 24th of October.

The company's upcoming dividend is ₹7.00 a share, following on from the last 12 months, when the company distributed a total of ₹7.00 per share to shareholders. Based on the last year's worth of payments, HeidelbergCement India has a trailing yield of 3.3% on the current stock price of ₹214.38. If you buy this business for its dividend, you should have an idea of whether HeidelbergCement India's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. HeidelbergCement India distributed an unsustainably high 149% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether HeidelbergCement India generated enough free cash flow to afford its dividend. HeidelbergCement India paid out more free cash flow than it generated - 117%, to be precise - last year, which we think is concerningly 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.

As HeidelbergCement India's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Check out our latest analysis for HeidelbergCement India

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see HeidelbergCement India's earnings per share have dropped 16% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, eight years ago, HeidelbergCement India has lifted its dividend by approximately 17% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. HeidelbergCement India is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has HeidelbergCement India got what it takes to maintain its dividend payments? Not only are earnings per share declining, but HeidelbergCement India is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Bottom line: HeidelbergCement India has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in HeidelbergCement India despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 1 warning sign for HeidelbergCement India you should know about.

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.