Divi's Laboratories Limited (NSE:DIVISLAB) Stock Goes Ex-Dividend In Just Three Days

Readers hoping to buy Divi's Laboratories Limited (NSE:DIVISLAB) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, 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 at least 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, Divi's Laboratories investors that purchase the stock on or after the 25th of July will not receive the dividend, which will be paid on the 10th of September.

The company's next dividend payment will be ₹30.00 per share, and in the last 12 months, the company paid a total of ₹30.00 per share. Looking at the last 12 months of distributions, Divi's Laboratories has a trailing yield of approximately 0.4% on its current stock price of ₹6731.50. If you buy this business for its dividend, you should have an idea of whether Divi's Laboratories's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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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. Fortunately Divi's Laboratories's payout ratio is modest, at just 36% of profit. A useful secondary check can be to evaluate whether Divi's Laboratories generated enough free cash flow to afford its dividend. It paid out an unsustainably high 370% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Divi's Laboratories intends to continue funding this dividend, or if it could be forced to cut the payment.

While Divi's Laboratories's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Divi's Laboratories to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

See our latest analysis for Divi's Laboratories

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Divi's Laboratories, with earnings per share up 9.7% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, Divi's Laboratories has lifted its dividend by approximately 12% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Has Divi's Laboratories got what it takes to maintain its dividend payments? Divi's Laboratories has seen its earnings per share grow steadily and paid out less than half its profit over the last year. Unfortunately, its dividend was not well covered by free cash flow. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

With that being said, if dividends aren't your biggest concern with Divi's Laboratories, you should know about the other risks facing this business. For example, we've found 1 warning sign for Divi's Laboratories 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.