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Readers hoping to buy NATCO Pharma Limited (NSE:NATCOPHARM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 22nd of August will not receive the dividend, which will be paid on the 29th of August.
NATCO Pharma's next dividend payment will be ₹1.25 per share, on the back of last year when the company paid a total of ₹6.25 to shareholders. Based on the last year's worth of payments, NATCO Pharma stock has a trailing yield of around 1.1% on the current share price of ₹544.3. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for NATCO Pharma
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. NATCO Pharma is paying out just 18% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether NATCO Pharma generated enough free cash flow to afford its dividend. It paid out more than half (53%) of its free cash flow in the past year, which is within an average range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see NATCO Pharma's earnings have been skyrocketing, up 39% per annum for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, NATCO Pharma has lifted its dividend by approximately 37% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Should investors buy NATCO Pharma for the upcoming dividend? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. NATCO Pharma looks solid on this analysis overall, and we'd definitely consider investigating it more closely.