Dividend Investors: Don't Be Too Quick To Buy Godrej Consumer Products Limited (NSE:GODREJCP) For Its Upcoming Dividend

It looks like Godrej Consumer Products Limited (NSE:GODREJCP) is about to go ex-dividend in the next 2 days. 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Godrej Consumer Products' shares on or after the 13th of August will not receive the dividend, which will be paid on the 5th of September.

The company's upcoming dividend is ₹5.00 a share, following on from the last 12 months, when the company distributed a total of ₹20.00 per share to shareholders. Based on the last year's worth of payments, Godrej Consumer Products has a trailing yield of 1.9% on the current stock price of ₹1050.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Godrej Consumer Products has been able to grow its dividends, or if the dividend might be cut.

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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. Godrej Consumer Products paid out 107% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It paid out 107% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

As Godrej Consumer Products's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Check out our latest analysis for Godrej Consumer Products

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 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 encouraged by the steady growth at Godrej Consumer Products, with earnings per share up 2.1% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Godrej Consumer Products is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

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, 10 years ago, Godrej Consumer Products has lifted its dividend by approximately 26% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Has Godrej Consumer Products got what it takes to maintain its dividend payments? Godrej Consumer Products is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

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 Godrej Consumer Products. For example - Godrej Consumer Products has 1 warning sign we think you should be aware of.

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.