Mahindra & Mahindra Financial Services' (NSE:M&MFIN) Dividend Will Be Increased To ₹6.00

Mahindra & Mahindra Financial Services Limited (NSE:M&MFIN) will increase its dividend from last year's comparable payment on the 27th of August to ₹6.00. This will take the dividend yield to an attractive 2.1%, providing a nice boost to shareholder returns.

Check out our latest analysis for Mahindra & Mahindra Financial Services

Mahindra & Mahindra Financial Services' Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Mahindra & Mahindra Financial Services' earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

The next year is set to see EPS grow by 67.7%. Assuming the dividend continues along recent trends, we think the payout ratio could be 22% by next year, which is in a pretty sustainable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2013, the annual payment back then was ₹2.80, compared to the most recent full-year payment of ₹6.00. This works out to be a compound annual growth rate (CAGR) of approximately 7.9% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Mahindra & Mahindra Financial Services might have put its house in order since then, but we remain cautious.

Mahindra & Mahindra Financial Services May Find It Hard To Grow The Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. In the last five years, Mahindra & Mahindra Financial Services' earnings per share has shrunk at approximately 3.8% per annum. 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.

Mahindra & Mahindra Financial Services' Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Mahindra & Mahindra Financial Services is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 3 warning signs for Mahindra & Mahindra Financial Services (of which 2 make us uncomfortable!) you should know about. 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.