Mahindra & Mahindra Financial Services (NSE:M&MFIN) Will Pay A Larger Dividend Than Last Year At ₹6.30

Mahindra & Mahindra Financial Services Limited (NSE:M&MFIN) has announced that it will be increasing its dividend from last year's comparable payment on the 22nd of August to ₹6.30. This makes the dividend yield 2.3%, which is above the industry average.

Check out our latest analysis for Mahindra & Mahindra Financial Services

Mahindra & Mahindra Financial Services' Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. 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.

Over the next year, EPS is forecast to expand by 69.0%. 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.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2014, the annual payment back then was ₹3.80, compared to the most recent full-year payment of ₹6.30. This works out to be a compound annual growth rate (CAGR) of approximately 5.2% 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.

Dividend Growth Potential Is Shaky

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 12% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

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 Mahindra & Mahindra Financial Services is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 3 warning signs for Mahindra & Mahindra Financial Services you should be aware of, and 2 of them can't be ignored. 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.