the board of Torrent Power Limited (NSE:TORNTPOWER) has announced that it will pay a dividend of Rs 4.00 per share on August 29. This payment means that the dividend yield will be 0.9%, a figure lower than the sector average.
While dividend yields are important to income investors, it is also important to consider any major share price movements, as they will generally offset any gains from distributions. Investors will be pleased to see that the Torrent Power share price has risen 32% in the last 3 months, which is good for shareholders and may also explain a decline in dividend yield.
See our latest analysis for Torrent Power
Torrent Power earnings easily cover distributions
It would be nice if the yield were higher, but we should also check whether higher levels of dividend payouts would be sustainable. According to the latest dividend, Torrent Power earns enough to cover the payout, but then it accounts for 104% of cash flows. This indicates that the company is more focused on returning cash flow to shareholders, but could mean the dividend is exposed to cuts in the future.
Looking ahead, earnings per share are expected to rise 78.3% over the next year. If the dividend continues on this path, the payout ratio could be 28% next year, which we think can be quite sustainable going forward.
Dividend volatility
The history of the company's dividends has been marked by instability, with at least one cut in the last 10 years. The annual payment for the last 10 years was INR 2.00 in 2014, and the payment for the most recent financial year was INR 13.00. This equates to a compound annual growth rate (CAGR) of approximately 21% per year over that time. Despite rapid dividend growth in recent years, we've seen payments decline as well, making us cautious.
Dividend likely to grow
Given that the dividend has been cut in the past, we should check if earnings are growing and if that could lead to stronger dividends in the future. Torrent Power has impressed us with EPS growth of 15% annually over the last five years. However, the lack of cash flows makes us a bit cautious, especially when it comes to the future of the dividend.
In summary
Overall, it is good to see a consistent dividend payout, but we believe that in the longer term the current level of payouts could become unsustainable. In the absence of cash flows, it is difficult to see how the company will be able to sustain dividend payments. We would probably look elsewhere for an income investment.
Companies that possess a stable dividend policy will likely enjoy greater investor interest than those that suffer from a more inconsistent approach. Still, investors should consider a number of other factors, in addition to dividend payments, when analyzing a company. For example, we have selected 2 warning signs for Torrent Power that investors should know before committing capital to this stock. Is Torrent Power not the opportunity you were looking for? Why don't you take a look at our selection of stocks with higher dividends.
Valuation is complex, but we are helping to simplify it.
Find out if torrent power is potentially overvalued or undervalued by checking out our full analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or financial situation. Our goal is to provide you with focused, long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
