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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Elecon Engineering Company Limited (NSE:ELECON) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 6th of September will not receive this dividend, which will be paid on the 17th of October.
Elecon Engineering's next dividend payment will be ₹0.20 per share, on the back of last year when the company paid a total of ₹0.20 to shareholders. Based on the last year's worth of payments, Elecon Engineering has a trailing yield of 0.7% on the current stock price of ₹29.9. 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! So we need to investigate whether Elecon Engineering can afford its dividend, and if the dividend could grow.
View our latest analysis for Elecon Engineering
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Elecon Engineering has a low and conservative payout ratio of just 3.6% of its income after tax. A useful secondary check can be to evaluate whether Elecon Engineering generated enough free cash flow to afford its dividend. Luckily it paid out just 5.3% of its free cash flow last year.
It's positive to see that Elecon Engineering'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.
Click here to see how much of its profit Elecon Engineering paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Elecon Engineering has grown its earnings rapidly, up 35% a year for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, Elecon Engineering looks like a promising growth company.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Elecon Engineering's dividend payments per share have declined at 18% per year on average over the past 10 years, which is uninspiring. Elecon Engineering is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.