Only Two Days Left To Cash In On Tata Consultancy Services' (NSE:TCS) Dividend

Readers hoping to buy Tata Consultancy Services Limited (NSE:TCS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 14th of January to receive the dividend, which will be paid on the 7th of February.

Tata Consultancy Services's next dividend payment will be ₹6.00 per share, and in the last 12 months, the company paid a total of ₹33.00 per share. Last year's total dividend payments show that Tata Consultancy Services has a trailing yield of 1.1% on the current share price of ₹3120.9. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Tata Consultancy Services

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Tata Consultancy Services's payout ratio is modest, at just 35% of profit. 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. The company paid out 97% 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.

Tata Consultancy Services paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Tata Consultancy Services 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?

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 fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Tata Consultancy Services's earnings per share have been growing at 10% a year for the past five years. Earnings have been growing at a decent rate, 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, Tata Consultancy Services has increased its dividend at approximately 21% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Tata Consultancy Services? We like that Tata Consultancy Services has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. Overall, it's hard to get excited about Tata Consultancy Services from a dividend perspective.

In light of that, while Tata Consultancy Services has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 1 warning sign for Tata Consultancy Services that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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