Why It Might Not Make Sense To Buy HeidelbergCement India Limited (NSE:HEIDELBERG) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see HeidelbergCement India Limited (NSE:HEIDELBERG) is about to trade ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase HeidelbergCement India's shares on or after the 18th of September will not receive the dividend, which will be paid on the 25th of October.

The company's upcoming dividend is ₹8.00 a share, following on from the last 12 months, when the company distributed a total of ₹8.00 per share to shareholders. Based on the last year's worth of payments, HeidelbergCement India has a trailing yield of 3.5% on the current stock price of ₹231.64. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for HeidelbergCement India

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. Last year HeidelbergCement India paid out 108% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Dividends consumed 57% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while HeidelbergCement India's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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 6.8% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last seven years, HeidelbergCement India has lifted its dividend by approximately 22% 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 108% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is HeidelbergCement India worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. What's more, HeidelbergCement India is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think HeidelbergCement India is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering HeidelbergCement India as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 1 warning sign for HeidelbergCement India that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.