Cummins India (NSE:CUMMINSIND) Is Increasing Its Dividend To ₹10.50

Cummins India Limited (NSE:CUMMINSIND) has announced that it will be increasing its dividend from last year's comparable payment on the 6th of September to ₹10.50. This will take the dividend yield to an attractive 1.9%, providing a nice boost to shareholder returns.

See our latest analysis for Cummins India

Cummins India's Earnings Easily Cover the Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last payment was quite easily covered by earnings, but it made up 96% of cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

The next year is set to see EPS grow by 12.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 51%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of ₹11.00 in 2012 to the most recent total annual payment of ₹21.00. This means that it has been growing its distributions at 6.7% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Cummins India might have put its house in order since then, but we remain cautious.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. However, Cummins India has only grown its earnings per share at 4.9% per annum over the past five years. Growth of 4.9% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. While this isn't necessarily a negative, it definitely signals that dividend growth could be constrained in the future unless earnings start to pick up again.

Our Thoughts On Cummins India's Dividend

Overall, we always like to see the dividend being raised, but we don't think Cummins India will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Cummins India that investors should know about before committing capital to this stock. Is Cummins India not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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