It Might Not Be A Great Idea To Buy South West Pinnacle Exploration Limited (NSE:SOUTHWEST) For Its Next 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 South West Pinnacle Exploration Limited (NSE:SOUTHWEST) is about to go ex-dividend in just three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, South West Pinnacle Exploration investors that purchase the stock on or after the 28th of February will not receive the dividend, which will be paid on the 15th of March.

The company's next dividend payment will be ₹0.25 per share. Last year, in total, the company distributed ₹0.50 to shareholders. Calculating the last year's worth of payments shows that South West Pinnacle Exploration has a trailing yield of 0.3% on the current share price of ₹152.90. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether South West Pinnacle Exploration has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for South West Pinnacle Exploration

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. South West Pinnacle Exploration has a low and conservative payout ratio of just 16% of its income after tax. 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. South West Pinnacle Exploration paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

Click here to see how much of its profit South West Pinnacle Exploration paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see South West Pinnacle Exploration's earnings per share have dropped 6.5% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. South West Pinnacle Exploration's dividend payments are broadly unchanged compared to where they were three years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

To Sum It Up

Is South West Pinnacle Exploration worth buying for its dividend? South West Pinnacle Exploration's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of South West Pinnacle Exploration.

Although, if you're still interested in South West Pinnacle Exploration and want to know more, you'll find it very useful to know what risks this stock faces. To that end, you should learn about the 3 warning signs we've spotted with South West Pinnacle Exploration (including 1 which is a bit unpleasant).

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.