Here's Why We're Wary Of Buying HeidelbergCement India's (NSE:HEIDELBERG) For Its Upcoming Dividend
It looks like HeidelbergCement India Limited (NSE:HEIDELBERG) is about to go ex-dividend in the next three days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase HeidelbergCement India's shares on or after the 11th of September will not receive the dividend, which will be paid on the 24th of October.
The company's next dividend payment will be ₹7.00 per share, and in the last 12 months, the company paid a total of ₹7.00 per share. Looking at the last 12 months of distributions, HeidelbergCement India has a trailing yield of approximately 4.4% on its current stock price of ₹160.17. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether HeidelbergCement India has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. HeidelbergCement India distributed an unsustainably high 118% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 109% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
HeidelbergCement India does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
Cash is slightly more important than profit from a dividend perspective, but given HeidelbergCement India's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
View our latest analysis for HeidelbergCement India
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by HeidelbergCement India's 18% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last nine years, HeidelbergCement India has lifted its dividend by approximately 15% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. HeidelbergCement India is already paying out 118% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Final Takeaway
Has HeidelbergCement India got what it takes to maintain its dividend payments? Not only are earnings per share declining, but HeidelbergCement India is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of HeidelbergCement India don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 1 warning sign with HeidelbergCement India and understanding them should be part of your investment process.
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.