Why It Might Not Make Sense To Buy UTI Asset Management Company Limited (NSE:UTIAMC) For Its Upcoming Dividend

It looks like UTI Asset Management Company Limited (NSE:UTIAMC) is about to go ex-dividend in the next three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible 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. In other words, investors can purchase UTI Asset Management's shares before the 14th of July in order to be eligible for the dividend, which will be paid on the 20th of August.

The company's upcoming dividend is ₹40.00 a share, following on from the last 12 months, when the company distributed a total of ₹40.00 per share to shareholders. Based on the last year's worth of payments, UTI Asset Management has a trailing yield of 4.1% on the current stock price of ₹984.10. 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 investigate whether UTI Asset Management can afford its dividend, and if the dividend could grow.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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. UTI Asset Management paid out 127% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

Check out our latest analysis for UTI Asset Management

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see UTI Asset Management's earnings per share have been shrinking at 4.2% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. UTI Asset Management has delivered an average of 19% per year annual increase in its dividend, based on the past five years of dividend payments. 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. UTI Asset Management is already paying out 127% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is UTI Asset Management an attractive dividend stock, or better left on the shelf? Earnings per share are in decline and UTI Asset Management is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

So if you're still interested in UTI Asset Management despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 2 warning signs with UTI Asset Management (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.