Should Income Investors Look At Aurobindo Pharma Limited (NSE:AUROPHARMA) Before Its Ex-Dividend?

Readers hoping to buy Aurobindo Pharma Limited (NSE:AUROPHARMA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase Aurobindo Pharma's shares on or after the 11th of November, you won't be eligible to receive the dividend, when it is paid on the 20th of November.

The company's next dividend payment will be ₹7.00 per share. Last year, in total, the company distributed ₹14.00 to shareholders. Looking at the last 12 months of distributions, Aurobindo Pharma has a trailing yield of approximately 0.8% on its current stock price of ₹1800.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Aurobindo Pharma can afford its dividend, and if the dividend could grow.

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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. Aurobindo Pharma has a low and conservative payout ratio of just 4.3% of its income after tax. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The good news is it paid out just 0.009% of its free cash flow in the last year.

It's positive to see that Aurobindo Pharma'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.

See our latest analysis for Aurobindo Pharma

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Aurobindo Pharma's earnings per share have fallen at approximately 5.3% a year over the previous 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. Aurobindo Pharma has delivered 21% dividend growth per year on average over the past 10 years.

Final Takeaway

Is Aurobindo Pharma an attractive dividend stock, or better left on the shelf? Aurobindo Pharma 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.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example, we've found 1 warning sign for Aurobindo Pharma that we recommend you consider before investing in the business.

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