Amara Raja Batteries Limited (NSE:AMARAJABAT) has announced it will be reducing its dividend payable on the 5th of September to ₹0.50. This means the annual payment is 1.0% of the current stock price, which is above the average for the industry.
See our latest analysis for Amara Raja Batteries
Amara Raja Batteries' Earnings Easily Cover the Distributions
A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, Amara Raja Batteries was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share is forecast to rise by 20.0% over the next year. If the dividend continues on this path, the payout ratio could be 14% by next year, which we think can be pretty sustainable going forward.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the first annual payment was ₹1.89, compared to the most recent full-year payment of ₹4.50. This works out to be a compound annual growth rate (CAGR) of approximately 9.1% a year over that time. 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's Growth Prospects Are Limited
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. Unfortunately, Amara Raja Batteries' earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. While growth may be thin on the ground, Amara Raja Batteries could always pay out a higher proportion of earnings to increase shareholder returns.
In Summary
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Amara Raja Batteries is earning enough to cover the payments, the cash flows are lacking. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 2 warning signs for Amara Raja Batteries that investors should know about before committing capital to this stock. 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.
About NSEI:ARE&M
Amara Raja Energy & Mobility
Manufactures and sells lead-acid storage batteries for industrial and automotive applications in India and internationally.
Excellent balance sheet with proven track record and pays a dividend.
