Readers wishing to buy JSW Steel Limited (NSE: JSWSTEEL) for its dividend will have to act shortly, as the stock is about to trade ex-dividend. The ex-dividend date is generally set at one working day before the registration date which is the deadline by which you must be present in the books of the company as a shareholder to receive the dividend. The ex-dividend date is an important date to know, as any purchase of shares made after this date may mean a late settlement which does not appear on the registration date. This means that you will have to buy the shares of JSW Steel before July 5 to receive the dividend, which will be paid on January 1.
The company’s next dividend will be 6.50 yen per share. Last year, in total, the company distributed 6.50 yen to shareholders. Looking at the last 12 months of distributions, JSW Steel has a sliding return of around 0.9% on its current price of 683.9. We love to see companies pay a dividend, but it’s also important to make sure that laying the golden eggs is not going to kill our goose that lays the golden eggs! So we need to determine if JSW Steel can afford its dividend and if the dividend could increase.
Check out our latest review for JSW Steel
If a company pays more dividends than it has earned, then the dividend could become unsustainable – which is not an ideal situation. JSW Steel has a low and conservative payout ratio of only 20% of its after-tax income. Having said that, even very profitable companies can sometimes not generate enough cash to pay the dividend, which is why we always need to check if the dividend is covered by the cash flow. The good thing is that dividends were well covered by free cash flow, with the company paying 5.1% of its cash flow last year.
It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.
Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.
Have profits and dividends increased?
Companies with strong growth prospects generally make the best dividend payers because dividends are easier to grow when earnings per share improve. If profits fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. For this reason, we are pleased to see that JSW Steel’s earnings per share have grown by 18% per year over the past five years. Earnings per share are growing rapidly and the company keeps more than half of its profits with the company; an attractive combination that could suggest that the company is focusing on reinvestment to further increase profits. This will make it easier to fund future growth efforts and we think this is an attractive combination – plus the dividend can always be increased later.
Most investors primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. JSW Steel has generated an average annual increase of 21% per annum in its dividend, based on dividend payments over the past 10 years. It is exciting to see that earnings and dividends per share have grown rapidly over the past few years.
From a dividend perspective, should investors buy or avoid JSW Steel? It’s great that JSW Steel is increasing its earnings per share while simultaneously paying out a small percentage of its earnings and cash flow. It’s disappointing that the dividend has been cut at least once in the past, but as it stands, the low payout ratio suggests a conservative approach to dividends, which we like. Overall, we think this is an attractive combination worthy of further research.
In light of this, while JSW Steel has an attractive dividend, it is worth knowing the risks associated with this stock. In terms of investment risks, we have identified 3 warning signs with JSW Steel and understanding them should be part of your investment process.
If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.
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