N2N Connect Berhad (KLSE:N2N) has announced it will be reducing its dividend payable on the 28th of December to RM0.01. However, the dividend yield of 6.7% is still a decent boost to shareholder returns.
N2N Connect Berhad Is Paying Out More Than It Is Earning
If the payments aren't sustainable, a high yield for a few years won't matter that much. N2N Connect 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 77% indicates it is more focused on returning cash to shareholders than growing the business.
Looking forward, earnings per share is forecast to fall by 18.1% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 139%, which could put the dividend under pressure if earnings don't start to improve.
N2N Connect Berhad's Dividend Has Lacked Consistency
Looking back, N2N Connect Berhad's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. The first annual payment during the last 8 years was RM0.03 in 2013, and the most recent fiscal year payment was RM0.04. This means that it has been growing its distributions at 3.7% per annum over that time. 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.
We Could See N2N Connect Berhad's Dividend Growing
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see N2N Connect Berhad has been growing its earnings per share at 8.8% a year over the past five years. Shareholders are getting plenty of the earnings returned to them, which combined with strong growth makes this quite appealing.
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While N2N Connect Berhad is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 4 warning signs for N2N Connect Berhad you should be aware of, and 1 of them is significant. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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.
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