Mahindra & Mahindra Financial Services (NSE:M&MFIN) Has Announced That It Will Be Increasing Its Dividend To ₹6.30

Mahindra & Mahindra Financial Services Limited's (NSE:M&MFIN) dividend will be increasing from last year's payment of the same period to ₹6.30 on 22nd of August. This will take the annual payment to 2.1% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for Mahindra & Mahindra Financial Services

Mahindra & Mahindra Financial Services' Earnings Easily Cover The Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Mahindra & Mahindra Financial Services was earning enough to cover the dividend, but it wasn't generating any free cash flows. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

The next year is set to see EPS grow by 70.4%. If the dividend continues on this path, the payout ratio could be 24% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was ₹3.80 in 2014, and the most recent fiscal year payment was ₹6.30. This means that it has been growing its distributions at 5.2% per annum 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.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Mahindra & Mahindra Financial Services' earnings per share has shrunk at 12% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. 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 becomes a long term trend.

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

In summary, while it's always good to see the dividend being raised, we don't think Mahindra & Mahindra Financial Services' payments are rock solid. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 3 warning signs for Mahindra & Mahindra Financial Services (2 are a bit concerning!) that you should be aware of before investing. 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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