Here's Why We're Wary Of Buying Wipro's (NSE:WIPRO) For Its Upcoming Dividend
Wipro Limited (NSE:WIPRO) stock is about to trade ex-dividend in three days. The ex-dividend date is usually set to be two business days 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase Wipro's shares on or after the 27th of July, you won't be eligible to receive the dividend, when it is paid on the 14th of August.
The company's next dividend payment will be ₹2.00 per share, on the back of last year when the company paid a total of ₹8.00 to shareholders. Based on the last year's worth of payments, Wipro stock has a trailing yield of around 4.6% on the current share price of ₹174.44. If you buy this business for its dividend, you should have an idea of whether Wipro's dividend is reliable and sustainable. So we need to investigate whether Wipro can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Wipro is paying out an acceptable 63% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 92% of its free cash flow in the form of dividends last year, which is outside the comfort zone 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 Wipro'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. Were this to happen repeatedly, this would be a risk to Wipro's ability to maintain its dividend.
View our latest analysis for Wipro
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Wipro earnings per share are up 6.9% per annum 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Wipro has delivered an average of 14% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has Wipro got what it takes to maintain its dividend payments? Wipro is paying out a reasonable percentage of its income and an uncomfortably high 92% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
So if you're still interested in Wipro despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 1 warning sign for Wipro you should be aware of.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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.