ITC (NSE:ITC) Has Announced That It Will Be Increasing Its Dividend To ₹5.25

ITC Limited (NSE:ITC) has announced that it will be increasing its dividend on the 4th of March to ₹5.25. The announced payment will take the dividend yield to 4.7%, which is in line with the average for the industry.

See our latest analysis for ITC

ITC's Dividend Is Well Covered By Earnings

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Based on the last dividend, ITC is earning enough to cover the payment, but the it makes up 113% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Earnings per share is forecast to rise by 12.4% over the next year. If the dividend continues growing along recent trends, we estimate the payout ratio could reach 92%, which is on the higher side, but certainly still feasible.

ITC Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was ₹1.87 in 2012, and the most recent fiscal year payment was ₹11.00. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

The Dividend Has Growth Potential

The company's investors will be pleased to have been receiving dividend income for some time. ITC has seen EPS rising for the last five years, at 7.2% per annum. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

In Summary

Overall, we always like to see the dividend being raised, but we don't think ITC will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

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. As an example, we've identified 1 warning sign for ITC that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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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.