We Wouldn't Be Too Quick To Buy West Coast Paper Mills Limited (NSE:WSTCSTPAPR) Before It Goes Ex-Dividend
It looks like West Coast Paper Mills Limited (NSE:WSTCSTPAPR) is about to go ex-dividend in the next 3 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase West Coast Paper Mills' shares before the 10th of August in order to receive the dividend, which the company will pay on the 16th of September.
The company's next dividend payment will be ₹3.00 per share. Last year, in total, the company distributed ₹3.00 to shareholders. Last year's total dividend payments show that West Coast Paper Mills has a trailing yield of 0.5% on the current share price of ₹590.40. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. West Coast Paper Mills is paying out just 13% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Over the past year it paid out 174% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
West Coast Paper Mills does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While West Coast Paper Mills'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 West Coast Paper Mills to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
See our latest analysis for West Coast Paper Mills
Click here to see how much of its profit West Coast Paper Mills paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that West Coast Paper Mills's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, West Coast Paper Mills has increased its dividend at approximately 12% a year on average.
To Sum It Up
Is West Coast Paper Mills worth buying for its dividend? It's disappointing to see earnings per share have fallen slightly, even though West Coast Paper Mills is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. 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 West Coast Paper Mills. Case in point: We've spotted 3 warning signs for West Coast Paper Mills you should be aware of.
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.