Why WIT is on the Brink of a Devastating Dividend Cut and How to Protect Your Portfolio

Investors in Wipro Limited (NYSE: WIT) are being lured by a dividend yield of 2.22%, but beneath the surface lies a company whose fundamentals are deteriorating rapidly. A payout ratio that has spiked to unsustainable levels, declining earnings momentum, and a worrying trend in free cash flow suggest WIT's dividend could face a brutal cut in the near term. This article dissects the risks and outlines how to shield your portfolio.

The Red Flags in WIT's Fundamentals

1. Payout Ratio Spikes to Unsustainable Levels
Wipro's dividend payout ratio surged to 197% in its March 2025 quarter, meaning dividends consumed nearly double its diluted earnings per share (EPS). This is nearly five times the software industry median of 42%. While the company aims to maintain payouts at 70% of net income over three years, the latest quarter's payout ratio suggests this goal is already being strained. A payout ratio this high is a red flag: if earnings dip—even slightly—the dividend could become unaffordable.

2. Earnings Growth Stalls Amid Revenue Headwinds
Despite a 21% year-over-year (YoY) rise in net income to $383 million in Q2 2024, Wipro's revenue is stalling. IT Services revenue fell 2% YoY in constant currency terms, dragged down by weak demand in key markets. Even large deal bookings—up 17% YoY—are insufficient to offset this slowdown. With the Q3 guidance projecting flat-to-down revenue, investors should brace for further pressure on earnings.

3. Free Cash Flow Declines Warn of Operational Strains
Wipro's free cash flow (FCF) has trended downward for years, dropping from $1.07 per share in 2019 to $0.56 in 2021. While the most recent quarterly operating cash flow hit $509.7 million (USD), FCF trends remain worrisome. The FCF yield of 5.33% (calculated as FCF/market cap) is misleading if FCF is measured in Indian rupees rather than USD, as the data notes. Regardless of currency, the downward trajectory signals inefficiencies or over-investment that could crimp cash reserves needed to sustain dividends.

4. Debt and Volatility Add to Risk
While Wipro's debt-to-equity ratio of 0.27% is low, its shares face a short interest ratio of 15.28x, indicating widespread bearish bets. With a beta of 1.08, WIT is 8% more volatile than the broader market, amplifying losses during downturns. The proposed 1:1 bonus share issuance—though shareholder-approved—does not address cash flow concerns and may dilute earnings per share further.

Contrasting WIT with Safer High-Yield Alternatives

Investors seeking dividends without the risks of WIT should consider companies with stable cash flows, conservative payout ratios, and robust balance sheets:

1. Microsoft (MSFT)
- Dividend Yield: 1.1% (vs. WIT's 2.22%)
- Payout Ratio: 33% (vs. WIT's 197%)
- FCF: $153 billion in 2023, up 12% YoY.
Microsoft's cloud dominance and recurring revenue streams ensure steady cash flows, making its dividend far more sustainable.

2. Realty Income (O)
- Dividend Yield: 4.5%
- Payout Ratio: 75% (well within safe limits)
This REIT's portfolio of long-term leases to essential businesses provides a reliable income stream, even in recessions.

3. Vanguard High Dividend Yield ETF (VYM)
- Dividend Yield: 3.2%
- Composition: Tracks 400+ high-quality, dividend-paying stocks with stable fundamentals.
Diversification reduces single-stock risk while maintaining income exposure.

Actionable Steps to Protect Your Portfolio

1. Monitor WIT's Q3 Earnings (Dec 31, 2024 Results)
2. If revenue misses expectations or FCF continues to decline, a dividend cut is likely.

3. Track the payout ratio: A sustained ratio above 100% is unsustainable.

4. Diversify into Safer Alternatives

5. Allocate capital to Microsoft or VYM to balance risk.

6. Consider Realty Income for high-yield stability.

7. Set Stop-Loss Orders on WIT

8. Place a stop-loss at $50 (10% below current levels) to limit losses if the dividend is cut.

9. Avoid New Positions in WIT

10. Focus on its risks until earnings stabilize and FCF trends improve.

Conclusion

Wipro's dividend allure is a trap for the unwary. With a payout ratio at crisis levels, stagnant revenue, and weakening FCF, the dividend could be slashed as soon as Q3 2024 results roll in. Investors must prioritize safety by diversifying into companies with proven cash flow generation and conservative payout policies. The path to preserving wealth in this sector lies in discipline—and avoiding the siren song of unsustainable yields.