Stock Analysis

Mahindra & Mahindra Financial Services' (NSE:M&MFIN) Shareholders Will Receive A Bigger Dividend Than Last Year

NSEI:M&MFIN
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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 annual payment to 1.9% of the stock price, which is above what most companies in the industry pay.

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 Mahindra & Mahindra Financial Services' stock price has increased by 39% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See 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. Mahindra & Mahindra Financial Services is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. 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.

Looking forward, earnings per share is forecast to rise by 67.7% over the next year. If the dividend continues on this path, the payout ratio could be 22% by next year, which we think can be pretty sustainable going forward.

historic-dividend
NSEI:M&MFIN Historic Dividend June 21st 2023

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend 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. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

The Dividend's Growth Prospects Are Limited

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 Mahindra & Mahindra Financial Services' EPS has declined at around 3.8% a year. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. 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

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. We don't think Mahindra & Mahindra Financial Services is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. To that end, Mahindra & Mahindra Financial Services has 3 warning signs (and 2 which don't sit too well with us) we think 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.