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Here's Why We're Wary Of Buying Duty Free International Limited's (SGX:5SO) For Its Upcoming Dividend

Simply Wall St

It looks like Duty Free International Limited (SGX:5SO) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 30th of October in order to be eligible for this dividend, which will be paid on the 7th of November.

Duty Free International's upcoming dividend is S$0.005 a share, following on from the last 12 months, when the company distributed a total of S$0.05 per share to shareholders. Calculating the last year's worth of payments shows that Duty Free International has a trailing yield of 9.2% on the current share price of SGD0.162. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Duty Free International has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Duty Free International

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Duty Free International distributed an unsustainably high 147% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 86% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Duty Free International'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.

Click here to see how much of its profit Duty Free International paid out over the last 12 months.

SGX:5SO Historical Dividend Yield, October 25th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Duty Free International's earnings per share have dropped 8.5% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, eight years ago, Duty Free International has lifted its dividend by approximately 2.8% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Duty Free International is already paying out 147% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Duty Free International worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. Additionally, Duty Free International is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Want to learn more about Duty Free International's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.