CARE Ratings (NSE:CARERATING) Is Increasing Its Dividend To ₹6.00

CARE Ratings Limited (NSE:CARERATING) will increase its dividend on the 13th of October to ₹6.00. This takes the dividend yield to 2.4%, which shareholders will be pleased with.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that CARE Ratings' stock price has increased by 38% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

Check out our latest analysis for CARE Ratings

CARE Ratings' Earnings Easily Cover the Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. CARE Ratings was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 90% indicates it is more focused on returning cash to shareholders than growing the business.

The next year is set to see EPS grow by 3.2%. If the dividend continues on this path, the payout ratio could be 53% by next year, which we think can be pretty sustainable going forward.

CARE Ratings' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The dividend has gone from ₹12.00 in 2013 to the most recent annual payment of ₹25.00. This means that it has been growing its distributions at 9.6% per annum over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth May Be Hard To Come By

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though CARE Ratings' EPS has declined at around 5.5% a year. 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. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

Our Thoughts On CARE Ratings' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While CARE Ratings is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for CARE Ratings (1 makes us a bit uncomfortable!) 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 performing dividend stock.

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