Power Grid Corporation of India's (NSE:POWERGRID) Shareholders Will Receive A Smaller Dividend Than Last Year

Power Grid Corporation of India Limited (NSE:POWERGRID) is reducing its dividend from last year's comparable payment to ₹2.75 on the 11th of September. This means the annual payment is 3.4% of the current stock price, which is above the average for the industry.

See our latest analysis for Power Grid Corporation of India

Power Grid Corporation of India's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Power Grid Corporation of India's dividend was comfortably covered by both cash flow and earnings. This indicates that quite a large proportion of earnings is being invested back into the business.

The next year is set to see EPS grow by 17.6%. Assuming the dividend continues along recent trends, we think the payout ratio could be 67% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of ₹1.55 in 2014 to the most recent total annual payment of ₹11.25. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. Power Grid Corporation of India has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

We Could See Power Grid Corporation of India's Dividend Growing

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. It's encouraging to see that Power Grid Corporation of India has been growing its earnings per share at 8.9% a year over the past five years. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.

Power Grid Corporation of India Looks Like A Great Dividend Stock

In general, we don't like to see the dividend being cut, especially when the company has such high potential like Power Grid Corporation of India does. By reducing the dividend, pressure will be taken off the balance sheet, which could help the dividend to be consistent in the future. Taking this all into consideration, this looks like it could be a good dividend opportunity.

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 instance, we've picked out 2 warning signs for Power Grid Corporation of India that investors should take into consideration. Is Power Grid Corporation of India not quite the opportunity you were looking for? Why not check out our selection of top 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.