Here's Why We're Wary Of Buying BirlaNu's (NSE:BIRLANU) For Its Upcoming Dividend

BirlaNu Limited (NSE:BIRLANU) 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. Accordingly, BirlaNu investors that purchase the stock on or after the 30th of July will not receive the dividend, which will be paid on the 21st of August.

The company's upcoming dividend is ₹15.00 a share, following on from the last 12 months, when the company distributed a total of ₹15.00 per share to shareholders. Looking at the last 12 months of distributions, BirlaNu has a trailing yield of approximately 1.1% on its current stock price of ₹1351.90. If you buy this business for its dividend, you should have an idea of whether BirlaNu's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. BirlaNu paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 86% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

See our latest analysis for BirlaNu

Click here to see how much of its profit BirlaNu 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. BirlaNu was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. BirlaNu's dividend payments are broadly unchanged compared to where they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

We update our analysis on BirlaNu every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Is BirlaNu an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." It's not that we think BirlaNu is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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 BirlaNu. Every company has risks, and we've spotted 2 warning signs for BirlaNu (of which 1 doesn't sit too well with us!) you should know about.

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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.