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 from 5.4% to 5.4%, providing a nice boost to shareholder returns.

See our latest analysis for Swaraj Engines

Swaraj Engines Is Paying Out More Than It Is Earning

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Swaraj Engines' dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 120% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

EPS is set to grow by 10.2% over the next year if recent trends continue. 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 first annual payment during the last 10 years was ₹10.00 in 2012, and the most recent fiscal year payment was ₹80.00. This works out to be a compound annual growth rate (CAGR) of approximately 23% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Dividend Growth Could Be Constrained

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. Swaraj Engines has seen EPS rising for the last five years, at 10% per annum. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

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. 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. We would probably look elsewhere for an income investment.

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 instance, we've picked out 1 warning sign for Swaraj Engines that investors should take into consideration. Is Swaraj Engines not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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