PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Is Reducing Its Dividend To MYR0.08

PETRONAS Chemicals Group Berhad (KLSE:PCHEM) has announced it will be reducing its dividend payable on the 21st of September to MYR0.08, which is 68% lower than what investors received last year for the same period. Despite the cut, the dividend yield of 5.9% will still be comparable to other companies in the industry.

Check out our latest analysis for PETRONAS Chemicals Group Berhad

PETRONAS Chemicals Group Berhad's Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. PETRONAS Chemicals Group Berhad was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 76% indicates it is more focused on returning cash to shareholders than growing the business.

Looking forward, earnings per share is forecast to rise by 23.5% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 47% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the annual payment back then was MYR0.16, compared to the most recent full-year payment of MYR0.41. This means that it has been growing its distributions at 9.9% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. PETRONAS Chemicals Group Berhad might have put its house in order since then, but we remain cautious.

PETRONAS Chemicals Group Berhad May Find It Hard To Grow The Dividend

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 PETRONAS Chemicals Group Berhad's earnings per share has fallen at approximately 4.7% per year over the past five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. 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 Chemicals Group Berhad's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments PETRONAS Chemicals Group Berhad has been making. Overall, we don't think this company has the makings of a good income stock.

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. For example, we've picked out 2 warning signs for PETRONAS Chemicals Group Berhad that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.