Bharat Forge's (NSE:BHARATFORG) Dividend Will Be Increased To ₹6.50

The board of Bharat Forge Limited (NSE:BHARATFORG) has announced that it will be paying its dividend of ₹6.50 on the 8th of September, an increased payment from last year's comparable dividend. This takes the annual payment to 0.6% of the current stock price, which is about average for the industry.

See our latest analysis for Bharat Forge

Bharat Forge's Payment Has Solid Earnings Coverage

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Bharat Forge's dividend was only 44% of earnings, however it was paying out 299% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Over the next year, EPS is forecast to expand by 157.8%. If the dividend continues on this path, the payout ratio could be 19% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the annual payment back then was ₹2.20, compared to the most recent full-year payment of ₹9.00. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Bharat Forge May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Unfortunately, Bharat Forge's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year.

Bharat Forge's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Bharat Forge is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 2 warning signs for Bharat Forge that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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