Garden Reach Shipbuilders & Engineers' (NSE:GRSE) Dividend Will Be Reduced To ₹0.70

Garden Reach Shipbuilders & Engineers Limited (NSE:GRSE) is reducing its dividend from last year's comparable payment to ₹0.70 on the 22nd of October. This means that the dividend yield is 0.8%, which is a bit low when comparing to other companies in the industry.

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 Garden Reach Shipbuilders & Engineers' stock price has increased by 76% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for Garden Reach Shipbuilders & Engineers

Garden Reach Shipbuilders & Engineers' Payment Has Solid Earnings Coverage

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before making this announcement, Garden Reach Shipbuilders & Engineers was easily earning enough to cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.

Over the next year, EPS is forecast to expand by 39.2%. Assuming the dividend continues along recent trends, we think the payout ratio could be 22% by next year, which is in a pretty sustainable range.

Garden Reach Shipbuilders & Engineers' Dividend Has Lacked Consistency

Looking back, the dividend has been unstable but with a relatively short history, we think it may be a bit early to draw conclusions about long term dividend sustainability. Since 2019, the dividend has gone from ₹3.70 total annually to ₹6.20. This means that it has been growing its distributions at 14% per annum over that time. Garden Reach Shipbuilders & Engineers has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

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. Garden Reach Shipbuilders & Engineers has seen EPS rising for the last five years, at 25% per annum. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.

Garden Reach Shipbuilders & Engineers Looks Like A Great Dividend Stock

In general, we don't like to see the dividend being cut, especially when the company has such high potential like Garden Reach Shipbuilders & Engineers does. By reducing the dividend, pressure will be taken off the balance sheet, which could help the dividend to be consistent in the future. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Garden Reach Shipbuilders & Engineers that investors should take into consideration. 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.