Tread With Caution Around Sime Darby Property Berhad's (KLSE:SIMEPROP) 4.8% Dividend Yield

Today we'll take a closer look at Sime Darby Property Berhad (KLSE:SIMEPROP) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Sime Darby Property Berhad pays a 4.8% dividend yield, and has been paying dividends for the past three years. It's certainly an attractive yield, but readers are likely curious about its staying power. There are a few simple ways to reduce the risks of buying Sime Darby Property Berhad for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Sime Darby Property Berhad!

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. Although Sime Darby Property Berhad pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Sime Darby Property Berhad's cash payout ratio in the last year was 33%, which suggests dividends were well covered by cash generated by the business.

We update our data on Sime Darby Property Berhad every 24 hours, so you can always get our latest analysis of its financial health, 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. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past three-year period, the first annual payment was RM0.04 in 2018, compared to RM0.03 last year. The dividend has shrunk at around 9.1% a year during that period. Sime Darby Property Berhad's dividend hasn't shrunk linearly at 9.1% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Sime Darby Property Berhad for its dividend, given that payments have shrunk over the past three years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Over the past five years, it looks as though Sime Darby Property Berhad's EPS have declined at around 84% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Sime Darby Property Berhad's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Overall, Sime Darby Property Berhad 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. 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 Sime Darby Property Berhad that investors should know about before committing capital to this stock.

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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