Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sharda Cropchem Limited (NSE:SHARDACROP) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 16th of August, you won't be eligible to receive this dividend, when it is paid on the 26th of September.

Sharda Cropchem's upcoming dividend is ₹2.00 a share, following on from the last 12 months, when the company distributed a total of ₹4.00 per share to shareholders. Based on the last year's worth of payments, Sharda Cropchem stock has a trailing yield of around 1.3% on the current share price of ₹306.35. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Sharda Cropchem can afford its dividend, and if the dividend could grow.

See our latest analysis for Sharda Cropchem

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. Sharda Cropchem is paying out just 22% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Sharda Cropchem generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 8.7% of its cash flow last year.

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

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Sharda Cropchem, with earnings per share up 8.2% on average over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Sharda Cropchem has delivered an average of 12% per year annual increase in its dividend, based on the past 4 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Should investors buy Sharda Cropchem for the upcoming dividend? Earnings per share growth has been growing somewhat, and Sharda Cropchem is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Sharda Cropchem is being conservative with its dividend payouts and could still perform reasonably over the long run. It's a promising combination that should mark this company worthy of closer attention.

Ever wonder what the future holds for Sharda Cropchem? See what the six analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.