NATCO Pharma Limited (NSE:NATCOPHARM) Looks Like A Good Stock, And It’s Going Ex-Dividend Soon

NATCO Pharma Limited (NSE:NATCOPHARM) stock is about to trade ex-dividend in two days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. 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. In other words, investors can purchase NATCO Pharma’s shares before the 20th of August in order to be eligible for the dividend, which will be paid on the 13th of September.

The company’s upcoming dividend is ₹1.50 a share, following on from the last 12 months, when the company distributed a total of ₹5.00 per share to shareholders. Based on the last year’s worth of payments, NATCO Pharma stock has a trailing yield of around 0.6% on the current share price of ₹903.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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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. NATCO Pharma has a low and conservative payout ratio of just 7.0% of its income after tax. 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. The good news is it paid out just 6.5% of its free cash flow in the last year.

It’s positive to see that NATCO 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.

See our latest analysis for NATCO Pharma

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

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. It’s encouraging to see NATCO Pharma has grown its earnings rapidly, up 21% a year for the past five years. NATCO Pharma looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, NATCO Pharma has lifted its dividend by approximately 17% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Should investors buy NATCO Pharma for the upcoming dividend? It’s great that NATCO 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. NATCO Pharma looks solid on this analysis overall, and we’d definitely consider investigating it more closely.

On that note, you’ll want to research what risks NATCO Pharma is facing. Every company has risks, and we’ve spotted 2 warning signs for NATCO Pharma (of which 1 is a bit concerning!) you should know about.

If you’re in the market for strong dividend payers, we recommend checking our selection of top 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.