Dividend Investors: Don't Be Too Quick To Buy Power Grid Corporation of India Limited (NSE:POWERGRID) For Its Upcoming Dividend
Power Grid Corporation of India Limited (NSE:POWERGRID) is about to trade ex-dividend in the next four days. 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 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. In other words, investors can purchase Power Grid Corporation of India's shares before the 13th of August in order to be eligible for the dividend, which will be paid on the 16th of September.
The company's next dividend payment will be ₹1.25 per share, on the back of last year when the company paid a total of ₹9.00 to shareholders. Last year's total dividend payments show that Power Grid Corporation of India has a trailing yield of 3.3% on the current share price of ₹271.60. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Power Grid Corporation of 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. Power Grid Corporation of India paid out more than half (53%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Power Grid Corporation of India generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 229% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Power Grid Corporation of India is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
While Power Grid Corporation of India's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Power Grid Corporation of India's ability to maintain its dividend.
Check out our latest analysis for Power Grid Corporation of India
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 encouraged by the steady growth at Power Grid Corporation of India, with earnings per share up 5.7% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Power Grid Corporation of India has delivered 23% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Has Power Grid Corporation of India got what it takes to maintain its dividend payments? Power Grid Corporation of India is paying out a reasonable percentage of its income and an uncomfortably high 229% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not that we think Power Grid Corporation of India is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Power Grid Corporation of India and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 2 warning signs with Power Grid Corporation of 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.