HBL Power Systems' (NSE:HBLPOWER) Dividend Will Be Increased To ₹0.40

The board of HBL Power Systems Limited (NSE:HBLPOWER) has announced that it will be paying its dividend of ₹0.40 on the 27th of October, an increased payment from last year's comparable dividend. Despite this raise, the dividend yield of 0.5% is only a modest boost to shareholder returns.

See our latest analysis for HBL Power Systems

HBL Power Systems' Earnings Easily Cover The Distributions

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, HBL Power Systems' earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Looking forward, earnings per share could rise by 19.3% over the next year if the trend from the last few years continues. If the dividend continues on this path, the payout ratio could be 11% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of ₹0.10 in 2012 to the most recent total annual payment of ₹0.40. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. HBL Power Systems 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. HBL Power Systems has impressed us by growing EPS at 19% per year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

In Summary

Overall, we always like to see the dividend being raised, but we don't think HBL Power Systems will make a great income stock. While HBL Power Systems is earning enough to cover the payments, the cash flows are lacking. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 2 warning signs for HBL Power Systems (of which 1 is potentially serious!) you should know about. Is HBL Power Systems not quite the opportunity you were looking for? Why not check out our selection of top 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.