Tech Mahindra (NSE:TECHM) Has Announced A Dividend Of ₹28.00

The board of Tech Mahindra Limited (NSE:TECHM) has announced that it will pay a dividend of ₹28.00 per share on the 9th of August. The yield is still above the industry average at 4.4%.

See our latest analysis for Tech Mahindra

Tech Mahindra's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 150% of what it was earning and 88% of cash flows. The company could be more focused on returning cash to shareholders, but this could indicate that growth opportunities are few and far between.

The next year is set to see EPS grow by 194.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 60%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of ₹1.25 in 2014 to the most recent total annual payment of ₹56.00. This works out to be a compound annual growth rate (CAGR) of approximately 46% a year 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.

The Dividend Has Limited Growth Potential

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. Tech Mahindra's EPS has fallen by approximately 11% per year during the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

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. The payments are bit high to be considered sustainable, and the track record isn't the best. 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Tech Mahindra that investors should know about before committing capital to this stock. 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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