CARE Ratings Limited (NSE: CARERATING) will increase its dividend on October 13 to 6.00. This brings the dividend yield to 2.4%, which shareholders will be delighted with.
While dividend yield is important for income investors, it is also important to take into account any significant change in the price of the shares, as this will generally outweigh any gains from distributions. Investors will be delighted to see that the CARE Ratings share price has risen 38% in the past 3 months, which is good for shareholders and may also explain a drop in dividend yield.
Check out our latest analysis for CARE Ratings
CARE Ratings income easily covers distributions
We like to see robust dividend yields, but it doesn’t matter if the payout isn’t sustainable. CARE Ratings was earning enough to cover the previous dividend, but it was paying a fairly large proportion of its free cash flow. The company earns enough to make the dividend achievable, but the 90% cash payout ratio indicates that it is more focused on returning money to shareholders than growing the business.
Next year, EPS is expected to rise 3.2%. If the dividend continues on that path, the payout ratio could be 53% by next year, which we believe may be quite sustainable going forward.
CARE Ratings dividend lacks consistency
Even in its relatively short history, the company has cut the dividend at least once. For this reason, we are a little cautious about the consistency of dividends over a full economic cycle. The dividend went from 12.00 in 2013 to the last annual payment of 25.00. This means that he increased his distributions by 9.6% per year during this period. We love to see dividends rise at a reasonable rate, but with at least a substantial reduction in payouts, we’re not sure this dividend stock would be ideal for someone who intends to live off their income.
Dividend growth can be hard to achieve
With a relatively volatile dividend, it is even more important to see if earnings per share increase. Over the past five years, it appears that CARE Ratings’ EPS has declined by around 5.5% per year. If profits continue to fall, the company may have to make the difficult choice of reducing the dividend or even stopping it altogether – the opposite of dividend growth. This is not all bad news though, as earnings are expected to rise over the next 12 months – we would just be a little cautious until this can turn into a longer term trend.
Our thoughts on the CARE Ratings dividend
Overall, it’s probably not a high-income stock, although the dividend is in the process of being increased. While CARE Ratings earns enough to cover the dividend, we are generally not impressed with its prospects for the future. We would probably look elsewhere for an income investment.
Companies with a stable dividend policy are likely to benefit from greater investor interest than those with a more inconsistent approach. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a business. For example, we have identified 3 warning signs for CARE assessments (1 makes us a little uncomfortable!) Which you should be aware of before investing. If you are a dividend investor, you can also view our curated list of high performing dividend stocks.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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