Granules India Limited (NSE:GRANULES) stock is about to trade ex-dividend in 3 days time. You will need to purchase shares before the 8th of August to receive the dividend, which will be paid on the 29th of August.

Granules India's next dividend payment will be ₹0.25 per share. Last year, in total, the company distributed ₹1.00 to shareholders. Looking at the last 12 months of distributions, Granules India has a trailing yield of approximately 1.1% on its current stock price of ₹92.65. If you buy this business for its dividend, you should have an idea of whether Granules India's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Granules India

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. Granules India has a low and conservative payout ratio of just 9.5% of its income after tax. Granules India paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

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. 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 Granules India has grown its earnings rapidly, up 23% a year for the past five years.

Granules India also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Granules India has lifted its dividend by approximately 23% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Has Granules India got what it takes to maintain its dividend payments? Granules India has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Granules India looks solid on this analysis overall, and we'd definitely consider investigating it more closely.