Elgi Equipments (NSE:ELGIEQUIP) Is Increasing Its Dividend To ₹1.15

The board of Elgi Equipments Limited (NSE:ELGIEQUIP) has announced that it will be increasing its dividend on the 11th of September to ₹1.15. Even though the dividend went up, the yield is still quite low at only 0.3%.

View our latest analysis for Elgi Equipments

Elgi Equipments' Earnings Easily Cover the Distributions

If it is predictable over a long period, even low dividend yields can be attractive. Prior to this announcement, Elgi Equipments' dividend was only 20% of earnings, however it was paying out 130% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

The next year is set to see EPS grow by 13.5%. If the dividend continues on this path, the payout ratio could be 19% by next year, which we think can be pretty sustainable going forward.

Elgi Equipments Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the first annual payment was ₹0.50, compared to the most recent full-year payment of ₹1.15. This works out to be a compound annual growth rate (CAGR) of approximately 8.7% a year over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Elgi Equipments has seen EPS rising for the last five years, at 19% per annum. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

Our Thoughts On Elgi Equipments' Dividend

Overall, we always like to see the dividend being raised, but we don't think Elgi Equipments will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Elgi Equipments stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.