Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Keppel Infrastructure Trust (SGX:A7RU) is about to go ex-dividend in just two days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Keppel Infrastructure Trust's shares on or after the 9th of November, you won't be eligible to receive the dividend, when it is paid on the 20th of November.
The company's next dividend payment will be S$0.033 per share, on the back of last year when the company paid a total of S$0.038 to shareholders. Last year's total dividend payments show that Keppel Infrastructure Trust has a trailing yield of 7.9% on the current share price of SGD0.485. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Keppel Infrastructure Trust paid out 193% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (71%) of its free cash flow in the past year, which is within an average range for most companies.
It's good to see that while Keppel Infrastructure Trust's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Keppel Infrastructure Trust's earnings per share have been shrinking at 4.7% a year over the previous five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Keppel Infrastructure Trust has delivered an average of 1.6% per year annual increase in its dividend, based on the past 10 years of dividend payments.
The Bottom Line
Is Keppel Infrastructure Trust an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. Worse, Keppel Infrastructure Trust's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Keppel Infrastructure Trust. For example, Keppel Infrastructure Trust has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.