It Might Not Be A Great Idea To Buy Manali Petrochemicals Limited (NSE:MANALIPETC) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Manali Petrochemicals Limited (NSE:MANALIPETC) 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. Accordingly, Manali Petrochemicals investors that purchase the stock on or after the 15th of September will not receive the dividend, which will be paid on the 25th of October.

The company's next dividend payment will be ₹0.75 per share, on the back of last year when the company paid a total of ₹0.75 to shareholders. Based on the last year's worth of payments, Manali Petrochemicals stock has a trailing yield of around 1.1% on the current share price of ₹70.75. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Manali Petrochemicals has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Manali Petrochemicals

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. Fortunately Manali Petrochemicals's payout ratio is modest, at just 25% of profit. A useful secondary check can be to evaluate whether Manali Petrochemicals generated enough free cash flow to afford its dividend. It paid out 91% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Manali Petrochemicals paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Manali Petrochemicals's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Manali Petrochemicals's 20% per annum decline in earnings in 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 10 years, Manali Petrochemicals has lifted its dividend by approximately 4.1% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid Manali Petrochemicals? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Manali Petrochemicals is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Manali Petrochemicals. For example - Manali Petrochemicals has 2 warning signs we think you should be aware of.

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.