Is It Worth Considering United Drilling Tools Limited (NSE:UNIDT) For Its Upcoming Dividend?

Readers hoping to buy United Drilling Tools Limited (NSE:UNIDT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Accordingly, United Drilling Tools investors that purchase the stock on or after the 21st of August will not receive the dividend, which will be paid on the 9th of September.

The company's next dividend payment will be ₹0.60 per share, on the back of last year when the company paid a total of ₹1.80 to shareholders. Looking at the last 12 months of distributions, United Drilling Tools has a trailing yield of approximately 0.8% on its current stock price of ₹224.28. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. United Drilling Tools has a low and conservative payout ratio of just 12% of its income after tax. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 10% of its cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

See our latest analysis for United Drilling Tools

Click here to see how much of its profit United Drilling Tools 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 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 United Drilling Tools's 9.1% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. United Drilling Tools has delivered 13% dividend growth per year on average over the past nine years.

To Sum It Up

Is United Drilling Tools worth buying for its dividend? United Drilling Tools has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

In light of that, while United Drilling Tools has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 3 warning signs for United Drilling Tools (1 shouldn't be ignored!) that you ought to be aware of before buying the shares.

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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.