Stock Analysis

Should 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) Be Part Of Your Dividend Portfolio?

KLSE:SEM
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Today we'll take a closer look at 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Investors might not know much about 7-Eleven Malaysia Holdings Berhad's dividend prospects, even though it has been paying dividends for the last six years and offers a 1.7% yield. A 1.7% yield is not inspiring, but the longer payment history has some appeal. The company also returned around 0.7% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying 7-Eleven Malaysia Holdings Berhad for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on 7-Eleven Malaysia Holdings Berhad!

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KLSE:SEM Historic Dividend February 6th 2021

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, 7-Eleven Malaysia Holdings Berhad paid out 72% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. 7-Eleven Malaysia Holdings Berhad's cash payout ratio last year was 14%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that 7-Eleven Malaysia Holdings Berhad's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

We update our data on 7-Eleven Malaysia Holdings Berhad every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. 7-Eleven Malaysia Holdings Berhad has been paying a dividend for the past six years. It's good to see that 7-Eleven Malaysia Holdings Berhad has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was RM0.03 in 2015, compared to RM0.02 last year. This works out to be a decline of approximately 1.4% per year over that time. 7-Eleven Malaysia Holdings Berhad's dividend has been cut sharply at least once, so it hasn't fallen by 1.4% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's not great to see that 7-Eleven Malaysia Holdings Berhad's have fallen at approximately 8.0% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. 7-Eleven Malaysia Holdings Berhad's payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than 7-Eleven Malaysia Holdings Berhad out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, 7-Eleven Malaysia Holdings Berhad has 3 warning signs (and 1 which is concerning) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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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. 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.
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