Kuala Lumpur Kepong Berhad (KLSE:KLK) will increase its dividend on the 1st of March to RM0.80. This takes the dividend yield from 4.6% to 4.6%, which shareholders will be pleased with.
Kuala Lumpur Kepong Berhad's Dividend Is Well Covered By Earnings
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Kuala Lumpur Kepong Berhad's dividend was only 48% of earnings, however it was paying out 549% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.
Looking forward, earnings per share is forecast to fall by 37.4% over the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 79% in the next 12 months, which is on the higher end of the range we would say is sustainable.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from RM0.60 in 2012 to the most recent annual payment of RM1.00. This implies that the company grew its distributions at a yearly rate of about 5.2% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Kuala Lumpur Kepong Berhad might have put its house in order since then, but we remain cautious.
The Dividend Has Growth Potential
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see Kuala Lumpur Kepong Berhad has been growing its earnings per share at 7.0% a year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.
Our Thoughts On Kuala Lumpur Kepong Berhad's Dividend
In summary, while it's always good to see the dividend being raised, we don't think Kuala Lumpur Kepong Berhad's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.
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. Case in point: We've spotted 2 warning signs for Kuala Lumpur Kepong Berhad (of which 1 shouldn't be ignored!) you should know about. We have also put together a list of global stocks with a solid dividend.
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