Don't Buy Transformers and Rectifiers (India) Limited (NSE:TRIL) For Its Next Dividend Without Doing These Checks

Stock Analysis

Readers hoping to buy Transformers and Rectifiers (India) Limited (NSE:TRIL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Transformers and Rectifiers (India)'s shares on or after the 28th of July, you won't be eligible to receive the dividend, when it is paid on the 29th of August.

The company's upcoming dividend is ₹0.15 a share, following on from the last 12 months, when the company distributed a total of ₹0.15 per share to shareholders. Looking at the last 12 months of distributions, Transformers and Rectifiers (India) has a trailing yield of approximately 0.5% on its current stock price of ₹29.6. If you buy this business for its dividend, you should have an idea of whether Transformers and Rectifiers (India)'s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Transformers and Rectifiers (India)

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. Transformers and Rectifiers (India) paid out just 14% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Transformers and Rectifiers (India) generated enough free cash flow to afford its dividend. Transformers and Rectifiers (India) paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.

Click here to see how much of its profit Transformers and Rectifiers (India) paid out over the last 12 months.

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Transformers and Rectifiers (India)'s earnings per share have fallen at approximately 9.8% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Transformers and Rectifiers (India)'s dividend payments per share have declined at 11% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

From a dividend perspective, should investors buy or avoid Transformers and Rectifiers (India)? Transformers and Rectifiers (India)'s earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Transformers and Rectifiers (India) as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 3 warning signs for Transformers and Rectifiers (India) (of which 1 shouldn't be ignored!) you should know about.

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.

Find out whether Transformers and Rectifiers (India) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Transformers and Rectifiers (India) Limited, together with its subsidiaries, manufactures and sells transformers in India.

Solid track record with mediocre balance sheet.