Don't Race Out To Buy MPS Limited (NSE:MPSLTD) Just Because It's Going Ex-Dividend

It looks like MPS Limited (NSE:MPSLTD) is about to go ex-dividend in the next 2 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. This means that investors who purchase MPS' shares on or after the 29th of January will not receive the dividend, which will be paid on the 21st of February.

The company's next dividend payment will be ₹33.00 per share, on the back of last year when the company paid a total of ₹90.00 to shareholders. Calculating the last year's worth of payments shows that MPS has a trailing yield of 3.7% on the current share price of ₹2463.60. If you buy this business for its dividend, you should have an idea of whether MPS's dividend is reliable and sustainable. So we need to investigate whether MPS can afford its dividend, and if the dividend could grow.

See our latest analysis for MPS

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. MPS distributed an unsustainably high 160% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether MPS generated enough free cash flow to afford its dividend. It paid out 90% 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.

As MPS's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see MPS's earnings per share have risen 14% per annum over the last five years. We're a bit put out by the fact that MPS paid out virtually all of its earnings and cashflow as dividends over the last year. Earnings are growing at a decent clip, so this payout ratio may prove sustainable, but it's not great to see.

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, MPS has lifted its dividend by approximately 18% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Is MPS worth buying for its dividend? While it's nice to see earnings per share growing, we're curious about how MPS intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Bottom line: MPS has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in MPS despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - MPS has 1 warning sign 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.