Cummins India's (NSE:CUMMINSIND) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Cummins India Limited (NSE:CUMMINSIND) has announced that it will be increasing its dividend on the 9th of March to ₹8.00. This will take the dividend yield from 1.7% to 1.7%, providing a nice boost to shareholder returns.

Check out 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. However, prior to this announcement, Cummins India's dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.

Looking forward, earnings per share is forecast to fall by 7.4% over the next year. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 53%, which is comfortable for the company to continue in the future.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from ₹11.43 in 2012 to the most recent annual payment of ₹16.00. This means that it has been growing its distributions at 3.4% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

The Dividend's Growth Prospects Are Limited

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. Earnings has been rising at 3.8% per annum over the last five years, which admittedly is a bit slow. Earnings growth is slow, but on the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.

In Summary

Overall, this is a reasonable dividend, and it being raised is an added bonus. While the payout ratios are a good sign, we are less enthusiastic about the company's dividend record. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for Cummins India that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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