Mahindra & Mahindra's (NSE:M&M) Dividend Will Be Increased To ₹16.25

Mahindra & Mahindra Limited (NSE:M&M) has announced that it will be increasing its dividend from last year's comparable payment on the 3rd of September to ₹16.25. This makes the dividend yield about the same as the industry average at 1.2%.

Check out our latest analysis for Mahindra & Mahindra

Mahindra & Mahindra's Dividend Is Well Covered By Earnings

Unless the payments are sustainable, the dividend yield doesn't mean too much. Based on the last payment, Mahindra & Mahindra was earning enough to cover the dividend, but free cash flows weren't positive. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Over the next year, EPS is forecast to fall by 5.9%. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 20%, which is comfortable for the company to continue in the future.

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. The dividend has gone from an annual total of ₹6.25 in 2013 to the most recent total annual payment of ₹16.25. This means that it has been growing its distributions at 10% per annum over that time. Mahindra & Mahindra has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Has Growth Potential

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. Mahindra & Mahindra has seen EPS rising for the last five years, at 6.0% per annum. Mahindra & Mahindra definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Our Thoughts On Mahindra & Mahindra's Dividend

Overall, we always like to see the dividend being raised, but we don't think Mahindra & Mahindra will make a great income stock. While Mahindra & Mahindra 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, Mahindra & Mahindra has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about. Is Mahindra & Mahindra not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.