JBM Auto Limited (NSE:JBMA) stock is about to trade ex-dividend in 3 days time. You can purchase shares before the 5th of September in order to receive the dividend, which the company will pay on the 14th of October.

JBM Auto's upcoming dividend is ₹2.25 a share, following on from the last 12 months, when the company distributed a total of ₹2.25 per share to shareholders. Last year's total dividend payments show that JBM Auto has a trailing yield of 1.5% on the current share price of ₹149.8. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for JBM Auto

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. JBM Auto has a low and conservative payout ratio of just 12% of its income after tax. A useful secondary check can be to evaluate whether JBM Auto generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 33% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that JBM Auto'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 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 fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see JBM Auto earnings per share are up 9.1% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. JBM Auto has delivered an average of 22% per year annual increase in its dividend, based on the past 9 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.