Indian Hume Pipe (NSE:INDIANHUME) Will Pay A Larger Dividend Than Last Year At ₹1.50

The Indian Hume Pipe Company Limited (NSE:INDIANHUME) has announced that it will be increasing its dividend from last year's comparable payment on the 31st of August to ₹1.50. Despite this raise, the dividend yield of 0.4% is only a modest boost to shareholder returns.

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 Indian Hume Pipe's stock price has increased by 48% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

View our latest analysis for Indian Hume Pipe

Indian Hume Pipe's Earnings Easily Cover The Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Before making this announcement, Indian Hume Pipe was easily earning enough to cover the dividend. This means that most of what the business earns is being used to help it grow.

Looking forward, earnings per share is forecast to rise by 56.6% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 6.4% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the annual payment back then was ₹1.20, compared to the most recent full-year payment of ₹1.50. This implies that the company grew its distributions at a yearly rate of about 2.3% over that duration. 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

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Over the past five years, it looks as though Indian Hume Pipe's EPS has declined at around 3.7% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Indian Hume Pipe's payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 3 warning signs for Indian Hume Pipe you should be aware of, and 1 of them is significant. Is Indian Hume Pipe not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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