PETRONAS Dagangan Berhad's (KLSE:PETDAG) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of PETRONAS Dagangan Berhad (KLSE:PETDAG) has announced that the dividend on 23rd of March will be increased to MYR0.40, which will be 54% higher than last year's payment of MYR0.26 which covered the same period. This takes the annual payment to 2.8% of the current stock price, which is about average for the industry.

See our latest analysis for PETRONAS Dagangan Berhad

PETRONAS Dagangan Berhad's Payment Has Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, PETRONAS Dagangan Berhad's dividend made up quite a large proportion of earnings but only 39% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS is forecast to expand by 21.9%. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 77% - on the higher side, but we wouldn't necessarily say this is unsustainable.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was MYR0.825 in 2013, and the most recent fiscal year payment was MYR0.62. This works out to be a decline of approximately 2.8% per year over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth May Be Hard To Come By

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though PETRONAS Dagangan Berhad's EPS has declined at around 6.4% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

Our Thoughts On PETRONAS Dagangan Berhad's Dividend

In summary, while it's always good to see the dividend being raised, we don't think PETRONAS Dagangan Berhad's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for PETRONAS Dagangan Berhad that investors should know about before committing capital to this stock. Is PETRONAS Dagangan Berhad not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.