AU Small Finance Bank (NSE:AUBANK) Is Due To Pay A Dividend Of ₹1.00

The board of AU Small Finance Bank Limited (NSE:AUBANK) has announced that it will pay a dividend of ₹1.00 per share on the 25th of August. This payment means the dividend yield will be 0.1%, which is below the average for the industry.

See our latest analysis for AU Small Finance Bank

AU Small Finance Bank's Dividend Forecasted To Be Well Covered By Earnings

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable.

AU Small Finance Bank has a good history of paying out dividends, with its current track record at 6 years. Using data from its latest earnings report, AU Small Finance Bank's payout ratio sits at 4.4%, an extremely comfortable number that shows that it can pay its dividend.

Looking forward, EPS is forecast to rise by 117.5% over the next 3 years. Analysts estimate the future payout ratio will be 5.5% over the same time period, which is in the range that makes us comfortable with the sustainability of the dividend.

AU Small Finance Bank's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This suggests that the dividend might not be the most reliable. Since 2018, the annual payment back then was ₹0.25, compared to the most recent full-year payment of ₹1.00. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time. AU Small Finance Bank 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 Looks Likely To Grow

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. AU Small Finance Bank has impressed us by growing EPS at 26% per year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

An additional note is that the company has been raising capital by issuing stock equal to 11% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

AU Small Finance Bank Looks Like A Great Dividend Stock

In summary, it is good to see that the dividend is staying consistent, and we don't think there is any reason to suspect this might change over the medium term. Earnings are easily covering distributions, and the company is generating plenty of cash. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for AU Small Finance Bank that you should be aware of before investing. Is AU Small Finance Bank 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.

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