Sundaram Finance's (NSE:SUNDARMFIN) Dividend Will Be Increased To ₹15.00

Sundaram Finance Limited (NSE:SUNDARMFIN) has announced that it will be increasing its dividend from last year's comparable payment on the 20th of August to ₹15.00. This takes the dividend yield to 0.9%, which shareholders will be pleased with.

See our latest analysis for Sundaram Finance

Sundaram Finance's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Sundaram Finance 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.

Over the next year, EPS is forecast to expand by 12.6%. Assuming the dividend continues along recent trends, we think the payout ratio could be 22% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the dividend has gone from ₹8.00 total annually to ₹24.00. This means that it has been growing its distributions at 12% per annum over that time. Sundaram 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

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Sundaram Finance has seen EPS rising for the last five years, at 12% per annum. 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.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Sundaram Finance's payments are rock solid. While Sundaram Finance 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.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 2 warning signs for Sundaram Finance (of which 1 makes us a bit uncomfortable!) you should know about. Is Sundaram 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.