Swaraj Engines (NSE:SWARAJENG) Is Increasing Its Dividend To ₹80.00

Swaraj Engines Limited (NSE:SWARAJENG) has announced that it will be increasing its dividend on the 24th of August to ₹80.00. This will take the dividend yield to an attractive 5.3%, providing a nice boost to shareholder returns.

Check out our latest analysis for Swaraj Engines

Swaraj Engines Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Swaraj Engines was paying out quite a large proportion of both earnings and cash flow, with the dividend being 120% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Earnings per share could rise by 10.2% over the next year if things go the same way as they have for the last few years. However, if the dividend continues growing along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 102% over the next year.

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 ₹10.00 in 2012 to the most recent annual payment of ₹80.00. This works out to be a compound annual growth rate (CAGR) of approximately 23% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Swaraj Engines Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Swaraj Engines has impressed us by growing EPS at 10% per year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Swaraj Engines will make a great income stock. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would be a touch cautious of relying on this stock primarily for the dividend income.

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 example, we've picked out 1 warning sign for Swaraj Engines that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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