Should You Buy Panama Petrochem Limited (NSE:PANAMAPET) For Its Upcoming Dividend?

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Panama Petrochem Limited (NSE:PANAMAPET) is about to go ex-dividend in just three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. This means that investors who purchase Panama Petrochem's shares on or after the 2nd of September will not receive the dividend, which will be paid on the 9th of October.

The company's upcoming dividend is ₹3.00 a share, following on from the last 12 months, when the company distributed a total of ₹5.00 per share to shareholders. Looking at the last 12 months of distributions, Panama Petrochem has a trailing yield of approximately 1.5% on its current stock price of ₹323.90. If you buy this business for its dividend, you should have an idea of whether Panama Petrochem's dividend is reliable and sustainable. As a result, readers should always check whether Panama Petrochem has been able to grow its dividends, or if the dividend might be cut.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Panama Petrochem paid out just 16% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. Fortunately, it paid out only 27% of its free cash flow in the past year.

It's positive to see that Panama Petrochem'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.

View our latest analysis for Panama Petrochem

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

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. That's why it's comforting to see Panama Petrochem's earnings have been skyrocketing, up 44% per annum for the past five years. Panama Petrochem is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Panama Petrochem has lifted its dividend by approximately 14% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Has Panama Petrochem got what it takes to maintain its dividend payments? It's great that Panama Petrochem is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Panama Petrochem looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

On that note, you'll want to research what risks Panama Petrochem is facing. For example, we've found 1 warning sign for Panama Petrochem that we recommend you consider before investing in the business.

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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.