HCL Technologies (NSE:HCLTECH) Will Pay A Dividend Of $10.00

HCL Technologies Limited (NSE:HCLTECH) will pay a dividend of $10.00 on the 2nd of November. Based on this payment, the dividend yield on the company's stock will be 4.0%, which is an attractive boost to shareholder returns.

Our analysis indicates that HCLTECH is potentially undervalued!

HCL Technologies Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before this announcement, HCL Technologies was paying out 92% of earnings, but a comparatively small 74% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

The next 12 months is set to see EPS grow by 20.8%. Assuming the dividend continues along recent trends, we think the payout ratio could get very high, which probably can't continue without starting to put some pressure on 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 2012, the annual payment back then was $0.0373, compared to the most recent full-year payment of $0.484. 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.

The Dividend Has Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that HCL Technologies has grown earnings per share at 7.0% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Our Thoughts On HCL Technologies' Dividend

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.

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. For instance, we've picked out 1 warning sign for HCL Technologies 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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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.