Tata Power (NSE:TATAPOWER) Is Increasing Its Dividend To ₹1.75

The board of The Tata Power Company Limited (NSE:TATAPOWER) has announced that it will be increasing its dividend on the 6th of August to ₹1.75. Even though the dividend went up, the yield is still quite low at only 0.8%.

See our latest analysis for Tata Power

Tata Power's Earnings Easily Cover the Distributions

If it is predictable over a long period, even low dividend yields can be attractive. Tata Power is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Looking forward, earnings per share is forecast to rise by 26.0% over the next year. If the dividend continues on this path, the payout ratio could be 21% by next year, which we think can be pretty sustainable going forward.

Tata Power Has A Solid Track Record

The company has an extended history of paying stable dividends. The first annual payment during the last 10 years was ₹1.25 in 2012, and the most recent fiscal year payment was ₹1.75. This works out to be a compound annual growth rate (CAGR) of approximately 3.4% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Tata Power has impressed us by growing EPS at 19% per year over the past five years. Tata Power definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Tata Power's payments are rock solid. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Tata Power is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for Tata Power (of which 1 is potentially serious!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.