Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see PropNex Limited (SGX:OYY) is about to trade ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 30th of August will not receive the dividend, which will be paid on the 16th of September.
PropNex’s upcoming dividend is S$0.013 a share, following on from the last 12 months, when the company distributed a total of S$0.025 per share to shareholders. Based on the last year’s worth of payments, PropNex stock has a trailing yield of around 4.9% on the current share price of SGD0.515. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are 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. PropNex paid out 69% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the last year, it paid out more than three-quarters (77%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, PropNex’s earnings per share have been growing at 13% a year for the past five years. It paid out more than three-quarters of its earnings in the last year, even though earnings per share are growing rapidly. We’re surprised that management has not elected to reinvest more in the business to accelerate growth further.
We’d also point out that PropNex issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill.
This is PropNex’s first year of paying a dividend, so it doesn’t have much of a history yet to compare to.
The Bottom Line
Has PropNex got what it takes to maintain its dividend payments? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That’s why we’re glad to see PropNex’s earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow – 69% and 77% respectively. Overall, it’s hard to get excited about PropNex from a dividend perspective.
Wondering what the future holds for PropNex? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.