Wheels India Limited (NSE:WHEELS) has announced it will be reducing its dividend payable on the 2nd of September to ₹1.00. Based on this payment, the dividend yield will be 0.2%, which is lower than the average for the industry.
Wheels India Is Paying Out More Than It Is Earning
If it is predictable over a long period, even low dividend yields can be attractive. Based on the last payment, Wheels India's profits didn't cover the dividend, but the company was generating enough cash instead. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.
Looking forward, EPS could fall by 46.3% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 254%, which is definitely a bit high to be sustainable going forward.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was ₹2.25 in 2011, and the most recent fiscal year payment was ₹5.65. This implies that the company grew its distributions at a yearly rate of about 9.6% over that duration. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.
The Dividend Has Limited Growth Potential
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. Over the past five years, it looks as though Wheels India's EPS has declined at around 46% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.
Wheels India's Dividend Doesn't Look Sustainable
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to it. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 4 warning signs for Wheels India (of which 2 don't sit too well with us!) you should know about. We have also put together a list of global stocks with a solid dividend.
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