Texmaco Rail & Engineering (NSE:TEXRAIL) Is Increasing Its Dividend To ₹0.50

The board of Texmaco Rail & Engineering Limited (NSE:TEXRAIL) has announced that it will be paying its dividend of ₹0.50 on the 25th of October, an increased payment from last year's comparable dividend. Although the dividend is now higher, the yield is only 0.2%, which is below the industry average.

Check out our latest analysis for Texmaco Rail & Engineering

Texmaco Rail & Engineering's Earnings Easily Cover The Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, Texmaco Rail & Engineering's dividend was only 15% of earnings, however it was paying out 146% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Over the next year, EPS is forecast to expand by 97.7%. If the dividend continues on this path, the payout ratio could be 6.8% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of ₹0.25 in 2014 to the most recent total annual payment of ₹0.50. This works out to be a compound annual growth rate (CAGR) of approximately 7.2% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Texmaco Rail & Engineering May Find It Hard To Grow The Dividend

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. However, Texmaco Rail & Engineering's EPS was effectively flat over the past five years, which could stop the company from paying more every year.

We should note that Texmaco Rail & Engineering has issued stock equal to 24% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Texmaco Rail & Engineering's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Texmaco Rail & Engineering's payments are rock solid. While Texmaco Rail & Engineering is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Texmaco Rail & Engineering that investors should know about before committing capital to this stock. Is Texmaco Rail & Engineering not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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