Do These 3 Checks Before Buying RITES Limited (NSE:RITES) For Its Upcoming Dividend

RITES Limited (NSE:RITES) is about to trade ex-dividend in the next 3 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 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. Thus, you can purchase RITES' shares before the 18th of September in order to receive the dividend, which the company will pay on the 25th of October.

The company's next dividend payment will be ₹2.75 per share. Last year, in total, the company distributed ₹7.95 to shareholders. Based on the last year's worth of payments, RITES stock has a trailing yield of around 3.8% on the current share price of ₹209.15. If you buy this business for its dividend, you should have an idea of whether RITES's dividend is reliable and sustainable. So we need to investigate whether RITES 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.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year RITES paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. RITES paid out more free cash flow than it generated - 142%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given RITES's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Check out our latest analysis for RITES

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that RITES's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last eight years, RITES has lifted its dividend by approximately 15% a year on average.

The Bottom Line

Has RITES got what it takes to maintain its dividend payments? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (93%) and cash flow (142%) as dividends. It's not that we think RITES is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in RITES despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 1 warning sign for RITES that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.