We Wouldn’t Be Too Quick To Buy Bajaj Auto Limited (NSE:BAJAJ-AUTO) Before It Goes Ex-Dividend
We Wouldn’t Be Too Quick To Buy Bajaj Auto Limited (NSE:BAJAJ-AUTO) Before It Goes Ex-Dividend
Bajaj Auto Limited (NSE:BAJAJ-AUTO) is about to trade ex-dividend in the next 2 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Bajaj Auto’s shares before the 30th of June to receive the dividend, which will be paid on the 24th of August.
The company’s next dividend payment will be ₹140 per share, on the back of last year when the company paid a total of ₹140 to shareholders. Based on the last year’s worth of payments, Bajaj Auto stock has a trailing yield of around 3.0% on the current share price of ₹4606.9. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether Bajaj Auto can afford its dividend, and if the dividend could grow.
See our latest analysis for Bajaj Auto
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. Bajaj Auto paid out 66% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Bajaj Auto generated enough free cash flow to afford its dividend. The company paid out 97% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings – expenses don’t pay themselves – so it’s not great to see it paying out so much of its cash flow.
While Bajaj Auto’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Cash is king, as they say, and were Bajaj Auto to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
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. With that in mind, we’re encouraged by the steady growth at Bajaj Auto, with earnings per share up 8.0% on average over the last five years. Earnings have been growing at a steady rate, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Bajaj Auto has lifted its dividend by approximately 12% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Is Bajaj Auto worth buying for its dividend? Bajaj Auto is paying out a reasonable percentage of its income and an uncomfortably high 97% of its cash flow as dividends. At least earnings per share have been growing steadily. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.
Having said that, if you’re looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Bajaj Auto. For example, we’ve found 1 warning sign for Bajaj Auto that we recommend you consider before investing in the business.
Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.
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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.
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