Mahindra & Mahindra Financial Services (NSE:M&MFIN) Will Pay A Larger Dividend Than Last Year At ₹6.50

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 21st of August to ₹6.50. This takes the dividend yield to 2.4%, which shareholders will be pleased with.

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Mahindra & Mahindra Financial Services' Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. 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 51.1%. Assuming the dividend continues along recent trends, we think the payout ratio could be 28% by next year, which is in a pretty sustainable range.

Check out our latest analysis for Mahindra & Mahindra Financial Services

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. The dividend has gone from an annual total of ₹3.80 in 2015 to the most recent total annual payment of ₹6.50. This works out to be a compound annual growth rate (CAGR) of approximately 5.5% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

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. However, Mahindra & Mahindra Financial Services' EPS was effectively flat over the past five years, which could stop the company from paying more every year.

We should note that Mahindra & Mahindra Financial Services has issued stock equal to 13% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

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

Overall, we always like to see the dividend being raised, but we don't think Mahindra & Mahindra Financial Services will make a great income stock. 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.

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. Case in point: We've spotted 2 warning signs for Mahindra & Mahindra Financial Services (of which 1 is a bit concerning!) 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.