Is LBI Capital Berhad’s (KLSE:LBICAP) 8.2% Dividend Worth Your Time?

Today we’ll take a closer look at LBI Capital Berhad (KLSE:LBICAP) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With LBI Capital Berhad yielding 8.2% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. The company also bought back stock equivalent to around 7.7% of market capitalisation this year. Some simple analysis can reduce the risk of holding LBI Capital Berhad for its dividend, and we’ll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

KLSE:LBICAP Historical Dividend Yield, January 20th 2020
KLSE:LBICAP Historical Dividend Yield, January 20th 2020

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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 48% of LBI Capital Berhad’s profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. LBI Capital Berhad’s cash payout ratio last year was 3.9%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It’s positive to see that LBI Capital 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.

With a strong net cash balance, LBI Capital Berhad investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of LBI Capital Berhad’s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of LBI Capital Berhad’s dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was RM0.025 in 2010, compared to RM0.05 last year. Dividends per share have grown at approximately 7.2% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. LBI Capital Berhad might have put its house in order since then, but we remain cautious.

Dividend Growth Potential

With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It’s not great to see that LBI Capital Berhad’s have fallen at approximately 3.8% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

To summarise, shareholders should always check that LBI Capital Berhad’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It’s great to see that LBI Capital Berhad is paying out a low percentage of its earnings and cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Ultimately, LBI Capital Berhad comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.

Now, if you want to look closer, it would be worth checking out our free research on LBI Capital Berhad management tenure, salary, and performance.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.