India Motor Parts & Accessories' (NSE:IMPAL) Shareholders Will Receive A Bigger Dividend Than Last Year

India Motor Parts & Accessories Limited (NSE:IMPAL) has announced that it will be increasing its dividend from last year's comparable payment on the 22nd of August to ₹18.00. This makes the dividend yield 2.5%, which is above the industry average.

See our latest analysis for India Motor Parts & Accessories

India Motor Parts & Accessories' Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, India Motor Parts & Accessories' dividend was only 46% of earnings, however it was paying out 136% of free 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.

Over the next year, EPS could expand by 12.3% if recent trends continue. If the dividend continues on this path, the payout ratio could be 47% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was ₹6.00 in 2014, and the most recent fiscal year payment was ₹27.00. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. India Motor Parts & Accessories has impressed us by growing EPS at 12% per year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think India Motor Parts & Accessories' payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think India Motor Parts & Accessories is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for India Motor Parts & Accessories that investors need to be conscious of moving forward. 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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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.

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