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 2.9%.

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, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 63%. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Over the next year, EPS is forecast to expand by 194.5%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 60% which would be quite comfortable going to take the dividend forward.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the annual payment back then was ₹1.25, compared to the most recent full-year payment of ₹40.00. This works out to be a compound annual growth rate (CAGR) of approximately 41% 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.

Dividend Growth Potential Is Shaky

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings per share has been sinking by 11% over the last five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. 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.

Tech Mahindra's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Tech Mahindra is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for Tech Mahindra that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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