HCL Technologies' (NSE:HCLTECH) Dividend Will Be Increased To $12.00

The board of HCL Technologies Limited (NSE:HCLTECH) has announced that it will be paying its dividend of $12.00 on the 31st of October, an increased payment from last year's comparable dividend. This makes the dividend yield 3.8%, which is above the industry average.

Check out our latest analysis for HCL Technologies

HCL Technologies Is Paying Out More Than It Is Earning

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, HCL Technologies' dividend made up quite a large proportion of earnings but only 67% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Over the next year, EPS is forecast to expand by 29.3%. If the dividend continues on its recent course, the company could be paying out several times what it earns in the next 12 months, which could start applying pressure to the balance sheet.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the annual payment back then was $0.0436, compared to the most recent full-year payment of $0.576. This means that it has been growing its distributions at 29% per annum 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.

We Could See HCL Technologies' Dividend Growing

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. HCL Technologies has impressed us by growing EPS at 6.6% per year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. As an example, we've identified 1 warning sign for HCL Technologies that you should be aware of before investing. Is HCL Technologies not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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