Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that MM Forges Limited (NSE:MMFL) is set to go ex-dividend in just three days. The ex-dividend date occurs one day before the record date which is the day shareholders must be on the books of the company to receive a dividend. The ex-dividend date is important because each time a stock is bought or sold, the transaction takes at least two business days to settle. Therefore, if you buy shares of MM Forgings on or after June 6, you will not be eligible to receive the dividend when it is paid on June 23.

The company’s next dividend payment will be ₹6.00 per share, and in the past 12 months the company has paid a total of ₹6.00 per share. Looking at the last 12 months of distributions, MM Forgings has a yield of around 0.7% on its current share price of ₹841.9. Dividends are an important source of income for many shareholders, but the health of the company is essential to sustaining those dividends. We therefore need to consider whether MM Forgings can afford its dividend and whether the dividend could increase.

See our latest analysis for MM Forgings

Dividends are usually paid out of company earnings, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. MM Forgings has a low and conservative payout ratio of just 13% of its after-tax income. Still, cash flow is even more important than earnings in evaluating a dividend, so we need to see if the company has generated enough cash to pay its distribution. It distributed 32% of its free cash flow as dividends, a comfortable level of distribution for most companies.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see how much profit MM Forgings has paid out over the last 12 months.

Have earnings and dividends increased?

Companies with strong growth prospects are generally the best dividend payers because it is easier to increase dividends when earnings per share improve. Investors love dividends, so if earnings fall and the dividend is cut, expect a stock to sell heavily at the same time. It is encouraging to see that MM Forgings has grown its revenue rapidly, growing by 20% per year over the past five years. Earnings per share have grown very rapidly and the company is paying out a relatively small percentage of its earnings and cash flow. Companies with rising earnings and low payout rates are often the best long-term dividend-paying stocks because the company can both increase its earnings and increase the percentage of earnings it pays out, essentially multiplying the dividend.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. MM Forgings has recorded dividend growth of 15% per year on average over the past 10 years. Earnings per share and dividends have both increased rapidly lately, which is great to see.

The essential

Is MM Forgings an attractive dividend stock, or is it better left on the shelf? MM Forgings increased earnings per share while simultaneously reinvesting in the business. Unfortunately, it has cut the dividend at least once in the last 10 years, but the conservative payout ratio makes the current dividend look sustainable. It’s a promising combination that should mark this company worthy of attention.

In light of this, although MM Forgings has an attractive dividend, it is worth knowing the risks associated with this stock. In terms of investment risks, we have identified 2 warning signs with MM Forgings and understanding them should be part of your investment process.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.