Hero MotoCorp's (NSE:HEROMOTOCO) Dividend Will Be ₹35.00

The board of Hero MotoCorp Limited (NSE:HEROMOTOCO) has announced that it will pay a dividend of ₹35.00 per share on the 8th of September. Based on this payment, the dividend yield on the company's stock will be 3.5%, which is an attractive boost to shareholder returns.

View our latest analysis for Hero MotoCorp

Hero MotoCorp's Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Hero MotoCorp's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 99% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Looking forward, earnings per share is forecast to rise by 49.6% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 50% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of ₹45.00 in 2013 to the most recent total annual payment of ₹100.00. This implies that the company grew its distributions at a yearly rate of about 8.3% over that duration. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Dividend Growth May Be Hard To Come By

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. In the last five years, Hero MotoCorp's earnings per share has shrunk at approximately 5.5% per annum. 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. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

The Dividend Could Prove To Be Unreliable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Hero MotoCorp that you should be aware of before investing. 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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