Is It Smart To Buy Rashtriya Chemicals and Fertilizers Limited (NSE:RCF) Before It Goes Ex-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 Rashtriya Chemicals and Fertilizers Limited (NSE:RCF) is about to go ex-dividend in just three days. Ex-dividend means that investors that purchase the stock on or after the 18th of February will not receive this dividend, which will be paid on the 7th of March.

Rashtriya Chemicals and Fertilizers's next dividend payment will be ₹1.20 per share, and in the last 12 months, the company paid a total of ₹2.84 per share. Calculating the last year's worth of payments shows that Rashtriya Chemicals and Fertilizers has a trailing yield of 4.5% on the current share price of ₹53.6. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Rashtriya Chemicals and Fertilizers has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Rashtriya Chemicals and Fertilizers

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. Rashtriya Chemicals and Fertilizers paid out a comfortable 43% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 2.6% of its cash flow last year.

It's positive to see that Rashtriya Chemicals and Fertilizers'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.

Click here to see how much of its profit Rashtriya Chemicals and Fertilizers paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Rashtriya Chemicals and Fertilizers's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings per share growth in recent times has not been a standout. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.

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, Rashtriya Chemicals and Fertilizers has lifted its dividend by approximately 8.1% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Rashtriya Chemicals and Fertilizers? Earnings per share have been flat over this time, but we're intrigued to see that Rashtriya Chemicals and Fertilizers 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. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine strong earnings per share growth with a low payout ratio, and Rashtriya Chemicals and Fertilizers is halfway there. It's a promising combination that should mark this company worthy of closer attention.

On that note, you'll want to research what risks Rashtriya Chemicals and Fertilizers is facing. Our analysis shows 2 warning signs for Rashtriya Chemicals and Fertilizers and you should be aware of these 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. 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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