Rico Auto Industries (NSE:RICOAUTO) Is Reducing Its Dividend To ₹0.60

Rico Auto Industries Limited (NSE:RICOAUTO) is reducing its dividend from last year's comparable payment to ₹0.60 on the 27th of October. This payment takes the dividend yield to 0.5%, which only provides a modest boost to overall returns.

Check out our latest analysis for Rico Auto Industries

Rico Auto Industries' Payment Has Solid Earnings Coverage

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. However, prior to this announcement, Rico Auto Industries' dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.

Looking forward, EPS could fall by 0.5% if the company can't turn things around from the last few years. If the dividend continues along recent trends, we estimate the payout ratio could be 22%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2014, the dividend has gone from ₹0.10 total annually to ₹0.60. This implies that the company grew its distributions at a yearly rate of about 20% over that duration. Rico Auto Industries 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's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. However, Rico Auto Industries' EPS was effectively flat over the past five years, which could stop the company from paying more every year.

Our Thoughts On Rico Auto Industries' Dividend

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Rico Auto Industries has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about. 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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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.