Indian Railway Finance (NSE:IRFC) Has Announced That It Will Be Increasing Its Dividend To ₹0.70

Indian Railway Finance Corporation Limited (NSE:IRFC) has announced that it will be increasing its dividend from last year's comparable payment on the 22nd of October to ₹0.70. This makes the dividend yield 3.1%, which is above the industry average.

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 Indian Railway Finance's stock price has increased by 52% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

View our latest analysis for Indian Railway Finance

Indian Railway Finance's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Indian Railway Finance is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Over the next year, EPS is forecast to expand by 8.3%. Assuming the dividend continues along recent trends, we think the payout ratio could be 32% by next year, which is in a pretty sustainable range.

Indian Railway Finance's Dividend Has Lacked Consistency

Looking back, the dividend has been unstable but with a relatively short history, we think it may be a bit early to draw conclusions about long term dividend sustainability. Since 2021, the dividend has gone from ₹2.10 total annually to ₹1.50. The dividend has fallen 29% over that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Dividend Has Growth Potential

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Indian Railway Finance has impressed us by growing EPS at 6.6% per year over the past five years. Indian Railway Finance definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Our Thoughts On Indian Railway Finance's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Indian Railway Finance's payments are rock solid. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 2 warning signs for Indian Railway Finance you should be aware of, and 1 of them is concerning. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.