It Might Not Be A Great Idea To Buy RHI Magnesita India Limited (NSE:RHIM) For Its Next Dividend

RHI Magnesita India Limited (NSE:RHIM) 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. 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. Meaning, you will need to purchase RHI Magnesita India's shares before the 5th of September to receive the dividend, which will be paid on the 13th of October.

The company's next dividend payment will be ₹2.50 per share, on the back of last year when the company paid a total of ₹2.50 to shareholders. Based on the last year's worth of payments, RHI Magnesita India has a trailing yield of 0.4% on the current stock price of ₹613.40. If you buy this business for its dividend, you should have an idea of whether RHI Magnesita India's dividend is reliable and sustainable. So we need to investigate whether RHI Magnesita India can afford its dividend, and if the dividend could grow.

See our latest analysis for RHI Magnesita India

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. RHI Magnesita India reported a loss last year, so it's not great to see that it has continued paying a dividend. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If RHI Magnesita India didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It distributed 27% of its free cash flow as dividends, a comfortable payout level for most companies.

Click here to see how much of its profit RHI Magnesita India paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. RHI Magnesita India reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

RHI Magnesita India also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, RHI Magnesita India has increased its dividend at approximately 7.2% a year on average.

We update our analysis on RHI Magnesita India every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Is RHI Magnesita India an attractive dividend stock, or better left on the shelf? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of RHI Magnesita India don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 1 warning sign for RHI Magnesita India 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.