Cummins India's (NSE:CUMMINSIND) Dividend Will Be Increased To ₹18.00

The board of Cummins India Limited (NSE:CUMMINSIND) has announced that it will be paying its dividend of ₹18.00 on the 6th of March, an increased payment from last year's comparable dividend. This will take the annual payment to 1.4% of the stock price, which is above what most companies in the industry pay.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Cummins India's stock price has increased by 47% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

Check out our latest analysis for Cummins India

Cummins India's Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. The last payment was quite easily covered by earnings, but it made up 106% 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.

Looking forward, earnings per share is forecast to rise by 24.0% over the next year. If the dividend continues on this path, the payout ratio could be 48% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2014, the annual payment back then was ₹13.00, compared to the most recent full-year payment of ₹36.00. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

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 Cummins India has been growing its earnings per share at 16% a year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

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. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Cummins India that investors need to be conscious of moving forward. 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.