Readers hoping to buy torrent power limited (NSE: TORNTPOWER) for its dividend will have to make its move shortly, as the stock is about to be listed ex-dividend. Typically, the ex-dividend date is one business day before the record date, which is the date a company determines shareholders eligible to receive a dividend. The ex-dividend date is important because every time a share is bought or sold, it takes at least two business days for the transaction to settle. That is, you must buy the Torrent Power shares before June 16 to receive the dividend, which will be paid on September 8.
The company's next dividend payment will be Rs 4.00 per share and in the last 12 months the company paid a total of Rs 9.00 per share. Based on the value of last year's payments, Torrent Power has a final return of 1.9% on the current share price of ₹680.4. Dividends contribute greatly to investment returns for long-term holders, but only if the dividend continues to be paid. So we need to investigate whether Torrent Power can pay its dividend and whether the dividend could grow.
See our latest Torrent Power review
If a company pays out more dividends than it earned, then the dividend may become unsustainable, which is not an ideal situation. Torrent Power paid out a comfortable 30% of its earnings last year. That being said, even highly profitable companies can sometimes not generate enough cash to pay the dividend, so we should always check whether cash flow covers the dividend. Torrent Power paid out more free cash flow than it generated (166%, to be precise) last year, which we think is worryingly high. It's hard to consistently pay back more cash than it generates without borrowing or using company cash, so we wonder how the company justifies this level of payment.
While Torrent Power's dividends were covered by the company's reported earnings, cash is somewhat more important, so it's not good to see the company not generating enough cash to pay its dividends. If this were to happen repeatedly, it would be a risk to Torrent Power's ability to maintain its dividend.
Click Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have earnings and dividends been growing?
Stocks of companies that generate sustainable earnings growth typically offer the best dividend prospects, as it is easier to increase dividends when earnings increase. Investors love dividends, so if earnings fall and the dividend is cut, expect a stock to sell off at the same time. Fortunately for readers, Torrent Power's earnings per share have grown 18% annually for the past five years. Earnings have been growing at a decent rate, but we are concerned that dividend payments have eaten up most of the company's cash flow over the last year.
The primary way most investors will assess a company's dividend prospects is by checking the historical dividend growth rate. Over the past 10 years, Torrent Power has raised its dividend by approximately 7.2% per year on average. We are pleased to see dividends increase along with earnings over a number of years, which may be a sign that the company intends to share growth with shareholders.
In summary
Should investors buy Torrent Power for the next dividend? We are pleased to see that the company has been improving its earnings per share while paying out a low percentage of revenue. However, it's not great to see him paying what we see as an uncomfortably high percentage of his cash flow. In general, we are not very bearish on stocks, but there are likely to be better dividend investments out there.
While it is tempting to invest in Torrent Power just for the dividends, you should always keep in mind the risks involved. Regarding investment risks, we have identified 2 warning signs with torrent power and understanding them should be part of your investment process.
If you are in the market for strong dividend payers, we recommend reviewing our selection of stocks with higher dividends.
Valuation is complex, but we are helping to simplify it.
Find out if torrent power is potentially overvalued or undervalued by consulting our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, internal transactions and financial health.
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This Simply Wall St article is general in nature. We provide feedback based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St does not have a position in any of the mentioned stocks.
