Dabur India's (NSE:DABUR) Dividend Will Be Increased To ₹5.25

Dabur India Limited (NSE:DABUR) has announced that it will be increasing its dividend from last year's comparable payment on the 12th of August to ₹5.25. This makes the dividend yield about the same as the industry average at 1.7%.

We've discovered 1 warning sign about Dabur India. View them for free.

Dabur India's Payment Could Potentially Have Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. Before making this announcement, Dabur India was paying out quite a large proportion of both earnings and cash flow, with the dividend being 100% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

The next year is set to see EPS grow by 40.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 64%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

See our latest analysis for Dabur India

Dividend Volatility

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. Since 2015, the annual payment back then was ₹1.75, compared to the most recent full-year payment of ₹8.00. This means that it has been growing its distributions at 16% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth May Be Hard To Achieve

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. Earnings has been rising at 4.1% per annum over the last five years, which admittedly is a bit slow. Slow growth and a high payout ratio could mean that Dabur India has maxed out the amount that it has been able to pay to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think Dabur India's payments are rock solid. The track record isn't great, and the payments are a bit high to be considered sustainable. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Dabur India that investors need to be conscious of moving forward. Is Dabur India not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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