The board of Sundaram Finance Limited (NSE:SUNDARMFIN) has announced that the dividend on 23rd of July will be increased to ₹6.00, which will be 100% higher than last year. This takes the dividend yield from 0.6% to 0.7%, which shareholders will be pleased with.
See our latest analysis for Sundaram Finance
Sundaram Finance’s Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn’t matter if the payment isn’t sustainable. Before making this announcement, Sundaram Finance was easily earning enough to cover the dividend. This means that most of its earnings are being retained to grow the business.
If the trend of the last few years continues, EPS will grow by 15.0% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 16%, which is in the range that makes us comfortable with the sustainability of the dividend.
Dividend Volatility
The company has a long dividend track record, but it doesn’t look great with cuts in the past. Since 2011, the first annual payment was ₹5.50, compared to the most recent full-year payment of ₹15.00. This works out to be a compound annual growth rate (CAGR) of approximately 11% 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 Looks Likely To Grow
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. We are encouraged to see that Sundaram Finance has grown earnings per share at 15% per year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Sundaram Finance’s prospects of growing its dividend payments in the future.
We Really Like Sundaram Finance’s Dividend
Overall, a dividend increase is always good, and we think that Sundaram Finance is a strong income stock thanks to its track record and growing earnings. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All in all, this checks a lot of the boxes we look for when choosing an income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we’ve come across 3 warning signs for Sundaram Finance you should be aware of, and 1 of them is significant. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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