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It Might Not Be A Great Idea To Buy Sembcorp Industries Ltd (SGX:U96) For Its Next Dividend

Simply Wall St

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 Sembcorp Industries Ltd (SGX:U96) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 21st of August to receive the dividend, which will be paid on the 4th of September.

Sembcorp Industries's next dividend payment will be S$0.02 per share. Last year, in total, the company distributed S$0.04 to shareholders. Based on the last year's worth of payments, Sembcorp Industries has a trailing yield of 1.8% on the current stock price of SGD2.23. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Sembcorp Industries can afford its dividend, and if the dividend could grow.

View our latest analysis for Sembcorp Industries

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. Sembcorp Industries paid out just 21% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out an unsustainably high 201% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Sembcorp Industries paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Sembcorp Industries's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

SGX:U96 Historical Dividend Yield, August 16th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Sembcorp Industries's earnings per share have dropped 16% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Sembcorp Industries has seen its dividend decline 9.6% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Sembcorp Industries? Sembcorp Industries's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not that we think Sembcorp Industries is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious what other investors think of Sembcorp Industries? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

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.