Tata Power (NSE:TATAPOWER) Will Pay A Larger Dividend Than Last Year At ₹1.75

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

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Tata Power is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Looking forward, earnings per share is forecast to rise by 30.7% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 20%, which is in the range that makes us comfortable with the sustainability of the dividend.

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. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Tata Power has 2 warning signs (and 1 which is significant) we think you should know about. 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.