The board of Muthoot Finance Limited (NSE:MUTHOOTFIN) has announced that it will pay a dividend of ₹20.00 per share on the 18th of May. The dividend yield will be 1.5% based on this payment which is still above the industry average.
Muthoot Finance's Earnings Easily Cover the Distributions
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Muthoot Finance 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 14.7% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 17% by next year, which is in a pretty sustainable range.
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 ₹4.00 in 2012 to the most recent annual payment of ₹20.00. This means that it has been growing its distributions at 17% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Looks Likely To Grow
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Muthoot Finance has grown earnings per share at 27% per year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Muthoot Finance's payments, as there could be some issues with sustaining them into the future. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Muthoot Finance 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 2 warning signs for Muthoot Finance (1 is potentially serious!) that you should be aware of before investing. Is Muthoot Finance not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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