Shriram Finance (NSE:SHRIRAMFIN) Will Pay A Larger Dividend Than Last Year At ₹22.00

The board of Shriram Finance Limited (NSE:SHRIRAMFIN) has announced that the dividend on 24th of November will be increased to ₹22.00, which will be 10% higher than last year's payment of ₹20.00 which covered the same period. This makes the dividend yield 1.4%, which is above the industry average.

Check out our latest analysis for Shriram Finance

Shriram Finance's Payment Could Potentially Have Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Shriram Finance's earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Looking forward, earnings per share is forecast to rise by 53.7% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 17%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the dividend has gone from ₹7.00 total annually to ₹45.00. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year over that time. Shriram Finance has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Shriram Finance has grown earnings per share at 12% per year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

Our Thoughts On Shriram Finance's Dividend

Overall, we always like to see the dividend being raised, but we don't think Shriram Finance will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic 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 3 warning signs for Shriram Finance (of which 2 are a bit concerning!) you should know about. Is Shriram Finance 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.