We Wouldn’t Be Too Quick To Buy Gujarat Pipavav Port Limited (NSE:GPPL) Before It Goes Ex-Dividend

Gujarat Pipavav Port Limited (NSE:GPPL) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company’s books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company’s books on the record date. This means that investors who purchase Gujarat Pipavav Port’s shares on or after the 18th of November will not receive the dividend, which will be paid on the 1st of December.

The company’s upcoming dividend is ₹2.70 a share, following on from the last 12 months, when the company distributed a total of ₹4.00 per share to shareholders. Based on the last year’s worth of payments, Gujarat Pipavav Port stock has a trailing yield of around 4.2% on the current share price of ₹95.65. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.

See our latest analysis for Gujarat Pipavav Port

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Gujarat Pipavav Port paid out 98% of its earnings, which is more than we’re comfortable with, unless there are mitigating circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.

It’s good to see that while Gujarat Pipavav Port’s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we’d be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That’s why it’s not ideal to see Gujarat Pipavav Port’s earnings per share have been shrinking at 2.4% a year over the previous five years.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Gujarat Pipavav Port has delivered 13% dividend growth per year on average over the past six years. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Gujarat Pipavav Port is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.

The Bottom Line

Has Gujarat Pipavav Port got what it takes to maintain its dividend payments? Earnings per share have been shrinking in recent times. Worse, Gujarat Pipavav Port’s paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it’s not a good combination. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.

Although, if you’re still interested in Gujarat Pipavav Port and want to know more, you’ll find it very useful to know what risks this stock faces. To help with this, we’ve discovered 1 warning sign for Gujarat Pipavav Port that you should be aware of before investing in their shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.