Three Days Left Until Mahanagar Gas Limited (NSE:MGL) Trades Ex-Dividend

Mahanagar Gas Limited (NSE:MGL) is about to trade ex-dividend in the next 3 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Mahanagar Gas' shares on or after the 14th of August will not receive the dividend, which will be paid on the 21st of September.

The company's upcoming dividend is ₹18.00 a share, following on from the last 12 months, when the company distributed a total of ₹30.00 per share to shareholders. Based on the last year's worth of payments, Mahanagar Gas stock has a trailing yield of around 2.3% on the current share price of ₹1320.20. If you buy this business for its dividend, you should have an idea of whether Mahanagar Gas's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Mahanagar Gas's payout ratio is modest, at just 28% of profit. 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. Mahanagar Gas paid out more free cash flow than it generated - 134%, 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.

While Mahanagar Gas'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 Mahanagar Gas to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

View our latest analysis for Mahanagar Gas

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Mahanagar Gas earnings per share are up 6.2% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, nine years ago, Mahanagar Gas has lifted its dividend by approximately 13% 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.

To Sum It Up

Should investors buy Mahanagar Gas for the upcoming dividend? Mahanagar Gas delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 134% of its cash flow over the last year, which is a mediocre outcome. To summarise, Mahanagar Gas looks okay on this analysis, although it doesn't appear a stand-out opportunity.

However if you're still interested in Mahanagar Gas as a potential investment, you should definitely consider some of the risks involved with Mahanagar Gas. For example, we've found 1 warning sign for Mahanagar Gas 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.