Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Aurobindo Pharma Limited (NSE:AUROPHARMA) is about to go ex-dividend in just three days. You can purchase shares before the 22nd of February in order to receive the dividend, which the company will pay on the 4th of March.
Aurobindo Pharma’s next dividend payment will be ₹1.50 per share, on the back of last year when the company paid a total of ₹3.00 to shareholders. Calculating the last year’s worth of payments shows that Aurobindo Pharma has a trailing yield of 0.3% on the current share price of ₹922.15. If you buy this business for its dividend, you should have an idea of whether Aurobindo Pharma’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.
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. Aurobindo Pharma paid out just 4.4% 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. What’s good is that dividends were well covered by free cash flow, with the company paying out 6.0% of its cash flow last year.
It’s positive to see that Aurobindo Pharma’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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That’s why it’s comforting to see Aurobindo Pharma’s earnings have been skyrocketing, up 28% per annum for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, Aurobindo Pharma looks like a promising growth company.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Aurobindo Pharma has delivered an average of 20% per year annual increase in its dividend, based on the past 10 years of dividend payments. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Should investors buy Aurobindo Pharma for the upcoming dividend? It’s great that Aurobindo Pharma is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It’s disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Be aware that Aurobindo Pharma is showing 3 warning signs in our investment analysis, and 1 of those can’t be ignored…
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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