Federal Bank's (NSE:FEDERALBNK) Shareholders Will Receive A Bigger Dividend Than Last Year

The Federal Bank Limited (NSE:FEDERALBNK) will increase its dividend from last year's comparable payment on the 30th of September to ₹1.20. Despite this raise, the dividend yield of 0.6% is only a modest boost to shareholder returns.

View our latest analysis for Federal Bank

Federal Bank's Earnings Will Easily Cover The Distributions

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

Federal Bank has a long history of paying out dividends, with its current track record at a minimum of 10 years. While past data isn't a guarantee for the future, Federal Bank's latest earnings report puts its payout ratio at 7.2%, showing that the company can pay out its dividends comfortably.

Looking forward, EPS is forecast to rise by 47.5% over the next 3 years. Analysts estimate the future payout ratio will be 11% over the same time period, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of ₹1.00 in 2014 to the most recent total annual payment of ₹1.20. This works out to be a compound annual growth rate (CAGR) of approximately 1.8% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Federal Bank has been growing its earnings per share at 18% a year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

Federal Bank Looks Like A Great Dividend Stock

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. Earnings are easily covering distributions, and the company is generating plenty of cash. Taking this all into consideration, this looks like it could be a good dividend opportunity.

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. For instance, we've picked out 2 warning signs for Federal Bank that investors should take into consideration. Is Federal 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.