Mahindra & Mahindra Financial Services' (NSE:M&MFIN) Dividend Will Be Increased To ₹6.50

The board of Mahindra & Mahindra Financial Services Limited (NSE:M&MFIN) has announced that it will be paying its dividend of ₹6.50 on the 21st of August, an increased payment from last year's comparable dividend. This will take the annual payment to 2.4% of the stock price, which is above what most companies in the industry pay.

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Mahindra & Mahindra Financial Services' Future Dividend Projections Appear Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Mahindra & Mahindra Financial Services' earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Looking forward, earnings per share is forecast to rise by 51.8% over the next year. If the dividend continues on this path, the payout ratio could be 25% by next year, which we think can be pretty sustainable going forward.

See our latest analysis for Mahindra & Mahindra Financial Services

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2015, the dividend has gone from ₹3.80 total annually to ₹6.50. This means that it has been growing its distributions at 5.5% 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.

The Dividend's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Although it's important to note that Mahindra & Mahindra Financial Services' earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. If Mahindra & Mahindra Financial Services is struggling to find viable investments, it always has the option to increase its payout ratio to pay more to shareholders.

Our Thoughts On Mahindra & Mahindra Financial Services' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Mahindra & Mahindra Financial Services has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about. Is Mahindra & Mahindra Financial Services not quite the opportunity you were looking for? Why not check out our selection of top 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.