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Readers hoping to buy Indraprastha Gas Limited (NSE:IGL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 12th of September will not receive this dividend, which will be paid on the 24th of October.
Indraprastha Gas's next dividend payment will be ₹2.40 per share. Last year, in total, the company distributed ₹2.40 to shareholders. Based on the last year's worth of payments, Indraprastha Gas stock has a trailing yield of around 0.7% on the current share price of ₹328.4. If you buy this business for its dividend, you should have an idea of whether Indraprastha Gas's dividend is reliable and sustainable. So we need to investigate whether Indraprastha Gas can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Indraprastha Gas
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. Indraprastha Gas paid out just 19% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 29% of its free cash flow in the past year.
It's positive to see that Indraprastha Gas'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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. 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 Indraprastha Gas has grown its earnings rapidly, up 20% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.