Does It Make Sense To Buy SHL Consolidated Bhd. (KLSE:SHL) For Its Yield?

Dividend paying stocks like SHL Consolidated Bhd. (KLSE:SHL) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, SHL Consolidated Bhd likely looks attractive to investors, given its 5.1% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

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. SHL Consolidated Bhd paid out 46% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. 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. Unfortunately, while SHL Consolidated Bhd pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

While the above analysis focuses on dividends relative to a company's earnings, we do note SHL Consolidated Bhd's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on SHL Consolidated Bhd's financial position 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. For the purpose of this article, we only scrutinise the last decade of SHL Consolidated Bhd's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was RM0.07 in 2010, compared to RM0.1 last year. Dividends per share have grown at approximately 3.6% 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.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

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. Over the past five years, it looks as though SHL Consolidated Bhd's EPS have declined at around 24% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and SHL Consolidated Bhd's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that SHL Consolidated Bhd's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. SHL Consolidated Bhd has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Earnings per share are down, and SHL Consolidated Bhd's dividend has been cut at least once in the past, which is disappointing. Overall, SHL Consolidated Bhd falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for SHL Consolidated Bhd (1 is a bit concerning!) that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 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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