Swaraj Engines (NSE:SWARAJENG) Is Increasing Its Dividend To ₹104.50

Swaraj Engines Limited (NSE:SWARAJENG) has announced that it will be increasing its dividend from last year's comparable payment on the 14th of August to ₹104.50. This takes the dividend yield to 2.6%, which shareholders will be pleased with.

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Swaraj Engines' Payment Could Potentially Have Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last dividend made up a very large portion of earnings and also represented 83% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.

The next year is set to see EPS grow by 34.2%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 69% which would be quite comfortable going to take the dividend forward.

View our latest analysis for Swaraj Engines

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. Since 2015, the annual payment back then was ₹35.00, compared to the most recent full-year payment of ₹104.50. This implies that the company grew its distributions at a yearly rate of about 12% over that duration. Swaraj Engines 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.

Swaraj Engines' Dividend Might Lack Growth

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Swaraj Engines has grown earnings per share at 18% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Our Thoughts On Swaraj Engines' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Swaraj Engines' payments are rock solid. Strong earnings growth means Swaraj Engines has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Swaraj Engines that investors should know about before committing capital to this stock. 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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