Mahindra & Mahindra Financial Services Limited (NSE:M&MFIN) dividend will increase to ₹3.60 on August 27. This will increase the annual payout from 2.0% to 2.0% of the share price, which is more than most companies in the industry pay.
Check out our latest analysis for Mahindra & Mahindra Financial Services
Mahindra & Mahindra Financial Services Earnings Easily Cover Distributions
A big dividend yield for a few years doesn’t mean much if it can’t be sustained. Prior to this announcement, earnings at Mahindra & Mahindra Financial Services easily covered the dividend, but free cash flow was negative. Since the company does not provide cash, payment to shareholders will become difficult at some point.
Next year is expected to see EPS increase by 52.3%. If the dividend continues to follow recent trends, we estimate the payout ratio to be 24%, which is within the range that allows us to be comfortable with the sustainability of the dividend.
Although the company has a long history of dividends, it has been cut at least once in the past 10 years. Since 2012, the dividend has increased from ₹2.80 to ₹3.60. This equates to a compound annual growth rate (CAGR) of approximately 2.5% per year during this period. The dividend has had some fluctuations in the past, so even though the dividend has been increased this year, we have to remember that it has been reduced in the past.
Dividend growth prospects are limited
With a relatively volatile dividend, it is even more important to assess whether earnings per share are increasing, which could indicate dividend growth in the future. Although it’s important to note that Mahindra & Mahindra Financial Services’ earnings per share have barely increased from five years ago, which could erode the purchasing power of the dividend over time. If Mahindra & Mahindra Financial Services is struggling to find viable investments, it always has the option of increasing its payout ratio to pay more to shareholders.
Overall, it’s probably not a great income stock, even though the dividend is being increased right now. Although the low payout ratio is a redeeming feature, this is offset by the minimum cash to cover payouts. We would be a bit cautious to rely on this stock primarily for dividend income.
Companies with a stable dividend policy are likely to enjoy greater investor interest than those that suffer from a more inconsistent approach. Yet investors must consider a host of other factors, aside from dividend payments, when analyzing a company. For example, we encountered 3 warning signs for Mahindra & Mahindra Financial Services you should be aware, and one of them doesn’t sit well with us. Looking for more high yield dividend ideas? Try our collection of strong dividend payers.
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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.