Is It Worth Considering Divi's Laboratories Limited (NSE:DIVISLAB) For Its Upcoming Dividend?

Divi's Laboratories Limited (NSE:DIVISLAB) is about to trade ex-dividend in the next four 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. 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. This means that investors who purchase Divi's Laboratories' shares on or after the 2nd of August will not receive the dividend, which will be paid on the 11th of September.

The company's next dividend payment will be ₹30.00 per share. Last year, in total, the company distributed ₹30.00 to shareholders. Calculating the last year's worth of payments shows that Divi's Laboratories has a trailing yield of 0.6% on the current share price of ₹4790.60. 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.

See our latest analysis for Divi's Laboratories

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. That's why it's good to see Divi's Laboratories paying out a modest 50% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 309% 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.

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

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. With that in mind, we're encouraged by the steady growth at Divi's Laboratories, with earnings per share up 3.4% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, Divi's Laboratories has increased its dividend at approximately 15% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Divi's Laboratories worth buying for its dividend? Divi's Laboratories delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 309% of its cash flow over the last year, which is a mediocre outcome. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

If you're not too concerned about Divi's Laboratories's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, we've found 2 warning signs for Divi's Laboratories that we recommend you consider before investing in the business.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com