Hero MotoCorp (NSE:HEROMOTOCO) Is Due To Pay A Dividend Of ₹35.00

The board of Hero MotoCorp Limited (NSE:HEROMOTOCO) has announced that it will pay a dividend on the 8th of September, with investors receiving ₹35.00 per share. This makes the dividend yield 3.7%, which will augment investor returns quite nicely.

View our latest analysis for Hero MotoCorp

Hero MotoCorp's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Hero MotoCorp was paying out quite a large proportion of both earnings and cash flow, with the dividend being 99% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

EPS is set to fall by 5.5% over the next 12 months if recent trends continue. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 77%, meaning that most of the company's earnings is being paid out to shareholders.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the annual payment back then was ₹45.00, compared to the most recent full-year payment of ₹100.00. This implies that the company grew its distributions at a yearly rate of about 8.3% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Hero MotoCorp might have put its house in order since then, but we remain cautious.

Dividend Growth May Be Hard To Come By

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's not great to see that Hero MotoCorp's earnings per share has fallen at approximately 5.5% per year over the past five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.

Hero MotoCorp's Dividend Doesn't Look Sustainable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While Hero MotoCorp is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. To that end, Hero MotoCorp has 2 warning signs (and 1 which is a bit concerning) we think you should know about. Is Hero MotoCorp not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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