RITES' (NSE:RITES) Dividend Is Being Reduced To ₹3.75

RITES Limited's (NSE:RITES) dividend is being reduced from last year's payment covering the same period to ₹3.75 on the 27th of August. The yield is still above the industry average at 4.5%.

View our latest analysis for RITES

RITES' Earnings Easily Cover The Distributions

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 making up a very large proportion of earnings and perhaps more concerning was that it was 116% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Over the next year, EPS is forecast to expand by 15.6%. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 87% - on the higher side, but we wouldn't necessarily say this is unsustainable.

RITES' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2018, the annual payment back then was ₹5.32, compared to the most recent full-year payment of ₹20.50. This implies that the company grew its distributions at a yearly rate of about 31% over that duration. 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.

RITES Could Grow Its Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. RITES has seen EPS rising for the last five years, at 8.1% per annum. 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, the dividend looks like it may have been a bit high, which explains why it has now been cut. Strong earnings growth means RITES has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. 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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