Swaraj Engines' (NSE:SWARAJENG) Upcoming Dividend Will Be Larger Than Last Year's

The board of 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 5.0%, providing a nice boost to shareholder returns.

View our latest analysis for Swaraj Engines

Swaraj Engines Is Paying Out More Than It Is Earning

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. Since 2012, the dividend has gone from ₹13.00 to ₹80.00. This implies that the company grew its distributions at a yearly rate of about 20% over that duration. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

Swaraj Engines' Dividend Might Lack Growth

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. 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.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. 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 probably look elsewhere for an income investment.

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. For example, we've picked out 1 warning sign for Swaraj Engines that investors should know about before committing capital to this stock. 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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