Don't Race Out To Buy Hinduja Global Solutions Limited (NSE:HGS) Just Because It's Going Ex-Dividend

Hinduja Global Solutions Limited (NSE:HGS) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Thus, you can purchase Hinduja Global Solutions' shares before the 19th of September in order to receive the dividend, which the company will pay on the 27th of October.

The company's next dividend payment will be ₹7.00 per share. Last year, in total, the company distributed ₹7.00 to shareholders. Looking at the last 12 months of distributions, Hinduja Global Solutions has a trailing yield of approximately 0.8% on its current stock price of ₹898.85. If you buy this business for its dividend, you should have an idea of whether Hinduja Global Solutions's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Hinduja Global Solutions

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. Hinduja Global Solutions paid out a comfortable 25% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Hinduja Global Solutions paid out more free cash flow than it generated - 142%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Hinduja Global Solutions does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Hinduja Global Solutions 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 Hinduja Global Solutions's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Hinduja Global Solutions's earnings per share have fallen at approximately 20% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

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, Hinduja Global Solutions has lifted its dividend by approximately 3.4% a year on average.

The Bottom Line

Is Hinduja Global Solutions an attractive dividend stock, or better left on the shelf? Hinduja Global Solutions's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Hinduja Global Solutions.

So if you're still interested in Hinduja Global Solutions despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for Hinduja Global Solutions (of which 1 is a bit unpleasant!) 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.