Do These 3 Checks Before Buying Sanofi India Limited (NSE:SANOFI) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sanofi India Limited (NSE:SANOFI) is about to trade ex-dividend in the next 3 days. 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Sanofi India's shares on or after the 25th of April, you won't be eligible to receive the dividend, when it is paid on the 14th of June.

The company's upcoming dividend is ₹117.00 a share, following on from the last 12 months, when the company distributed a total of ₹117 per share to shareholders. Last year's total dividend payments show that Sanofi India has a trailing yield of 1.9% on the current share price of ₹6221.50. If you buy this business for its dividend, you should have an idea of whether Sanofi India's dividend is reliable and sustainable. So we need to investigate whether Sanofi India can afford its dividend, and if the dividend could grow.

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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. It paid out 86% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Sanofi India generated enough free cash flow to afford its dividend. The company paid out 90% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Sanofi India paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Sanofi India's ability to maintain its dividend.

View our latest analysis for Sanofi India

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Sanofi India's earnings per share have fallen at approximately 5.4% a year over the previous 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. In the last 10 years, Sanofi India has lifted its dividend by approximately 10% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Sanofi India is already paying out 86% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Has Sanofi India got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Sanofi India.

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 Sanofi India. Every company has risks, and we've spotted 1 warning sign for Sanofi India you should know about.

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.