Poonawalla Fincorp (NSE:POONAWALLA) Is Increasing Its Dividend To ₹2.00

The board of Poonawalla Fincorp Limited (NSE:POONAWALLA) has announced that it will be paying its dividend of ₹2.00 on the 24th of August, an increased payment from last year's comparable dividend. Despite this raise, the dividend yield of 0.6% is only a modest boost to shareholder returns.

Check out our latest analysis for Poonawalla Fincorp

Poonawalla Fincorp's Earnings Easily Cover The Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Poonawalla Fincorp is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Analysts expect a massive rise in earnings per share in the next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 9.4%, which makes us pretty comfortable with the sustainability of the dividend.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was ₹0.80 in 2013, and the most recent fiscal year payment was ₹2.00. This means that it has been growing its distributions at 9.6% per annum 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.

Dividend Growth Is Doubtful

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. Over the past five years, it looks as though Poonawalla Fincorp's EPS has declined at around 5.8% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

Poonawalla Fincorp's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Poonawalla Fincorp will make a great income stock. While Poonawalla Fincorp is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. To that end, Poonawalla Fincorp has 3 warning signs (and 2 which can't be ignored) 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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