Should You Buy Steel Authority of India Limited (NSE:SAIL) For Its Upcoming Dividend?

Steel Authority of India Limited (NSE:SAIL) 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Steel Authority of India investors that purchase the stock on or after the 30th of September will not receive the dividend, which will be paid on the 24th of October.

The company's next dividend payment will be ₹2.35 per share, on the back of last year when the company paid a total of ₹2.35 to shareholders. Last year's total dividend payments show that Steel Authority of India has a trailing yield of 1.3% on the current share price of ₹185.00. If you buy this business for its dividend, you should have an idea of whether Steel Authority of India's dividend is reliable and sustainable. As a result, readers should always check whether Steel Authority of India 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. Steel Authority of India paid out a comfortable 29% of its profit last year. 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. Luckily it paid out just 6.4% of its free cash flow last year.

It's positive to see that Steel Authority of India's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Check out our latest analysis for Steel Authority of India

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Steel Authority of India's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Recent growth has not been impressive. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past seven years, Steel Authority of India has increased its dividend at approximately 25% a year on average.

The Bottom Line

Should investors buy Steel Authority of India for the upcoming dividend? The company has barely grown earnings per share over this time, but at least it's paying out a decently low percentage of its earnings and cashflow as dividends. This could suggest management is reinvesting in future growth opportunities. Generally we like to see both low payout ratios and strong earnings per share growth, but Steel Authority of India is halfway there. Overall we think this is an attractive combination and worthy of further research.

On that note, you'll want to research what risks Steel Authority of India is facing. Case in point: We've spotted 2 warning signs for Steel Authority of India you should be aware of.

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.