New India Assurance (NSE:NIACL) Has Announced That Its Dividend Will Be Reduced To ₹1.80

The New India Assurance Company Limited (NSE:NIACL) has announced that on 1st of January, it will be paying a dividend of₹1.80, which a reduction from last year's comparable dividend. This means the annual payment is 1.0% of the current stock price, which is above the average for the industry.

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New India Assurance's Payment Could Potentially Have Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, New India Assurance was earning enough to cover the dividend, but free cash flows weren't positive. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Over the next year, EPS is forecast to expand by 24.7%. 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.

See our latest analysis for New India Assurance

New India Assurance's Dividend Has Lacked Consistency

It's comforting to see that New India Assurance has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2017, the annual payment back then was ₹3.75, compared to the most recent full-year payment of ₹1.80. This works out to be a decline of approximately 8.8% per year over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth May Be Hard To Come By

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. New India Assurance has seen earnings per share falling at 6.4% per year over the last five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While New India Assurance 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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for New India Assurance that investors should take into consideration. 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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