Don't Race Out To Buy Procter & Gamble Health Limited (NSE:PGHL) Just Because It's Going Ex-Dividend

Readers hoping to buy Procter & Gamble Health Limited (NSE:PGHL) 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Procter & Gamble Health investors that purchase the stock on or after the 22nd of August will not receive the dividend, which will be paid on the 25th of September.

The company's next dividend payment will be ₹45.00 per share, and in the last 12 months, the company paid a total of ₹125 per share. Calculating the last year's worth of payments shows that Procter & Gamble Health has a trailing yield of 2.0% on the current share price of ₹6295.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Procter & Gamble Health distributed an unsustainably high 110% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Over the past year it paid out 145% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Procter & Gamble Health's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

See our latest analysis for Procter & Gamble Health

Click here to see how much of its profit Procter & Gamble Health 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Procter & Gamble Health's earnings per share have risen 13% per annum over the last five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 110% of earnings. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Procter & Gamble Health has delivered 35% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Is Procter & Gamble Health an attractive dividend stock, or better left on the shelf? While it's nice to see earnings per share growing, we're curious about how Procter & Gamble Health 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. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Procter & Gamble Health.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Procter & Gamble Health. For example, we've found 1 warning sign for Procter & Gamble Health 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.