RITES' (NSE:RITES) Dividend Is Being Reduced To ₹1.75

RITES Limited (NSE:RITES) is reducing its dividend from last year's comparable payment to ₹1.75 on the 6th of December. The yield is still above the industry average at 3.2%.

View our latest analysis for RITES

RITES' Future Dividends May Potentially Be At Risk

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, RITES' dividend was only 59% of earnings, however it was paying out 125% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Looking forward, EPS could fall by 7.3% if the company can't turn things around from the last few years. If the dividend continues along recent trends, we estimate the payout ratio could reach 211%, which could put the dividend in jeopardy if the company's earnings don't improve.

RITES' Dividend Has Lacked Consistency

It's comforting to see that RITES has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 6 years was ₹2.66 in 2018, and the most recent fiscal year payment was ₹9.00. This means that it has been growing its distributions at 23% per annum over that time. RITES 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.

Dividend Growth Is Doubtful

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that RITES' earnings per share has fallen at approximately 7.3% per year over the past five years. 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.

RITES' Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While RITES is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for RITES that you should be aware of before investing. 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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