We Wouldn't Be Too Quick To Buy PCBL Chemical Limited (NSE:PCBL) Before It Goes Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that PCBL Chemical Limited (NSE:PCBL) is about to go ex-dividend in just day or two. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase PCBL Chemical's shares before the 4th of August to receive the dividend, which will be paid on the 28th of August.

The company's upcoming dividend is ₹4.50 a share, following on from the last 12 months, when the company distributed a total of ₹6.00 per share to shareholders. Based on the last year's worth of payments, PCBL Chemical stock has a trailing yield of around 1.9% on the current share price of ₹317.90. If you buy this business for its dividend, you should have an idea of whether PCBL Chemical'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. PCBL Chemical distributed an unsustainably high 117% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 27% of its free cash flow as dividends, a comfortable payout level for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and PCBL Chemical fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

View our latest analysis for PCBL Chemical

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by PCBL Chemical's 6.3% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, PCBL Chemical has lifted its dividend by approximately 51% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. PCBL Chemical is already paying out 117% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is PCBL Chemical an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 117% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 PCBL Chemical. For example, PCBL Chemical has 4 warning signs (and 1 which makes us a bit uncomfortable) we think 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.