Keppel (SGX:BN4) Has Announced A Dividend Of SGD0.15

The board of Keppel Ltd. (SGX:BN4) has announced that it will pay a dividend of SGD0.15 per share on the 23rd of August. This means the annual payment is 5.7% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Keppel

Keppel's Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Keppel's dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. This is a pretty unsustainable practice, and could be risky if continued for the long term.

Over the next year, EPS is forecast to expand by 59.8%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 73% which brings it into quite a comfortable range.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was SGD0.40 in 2014, and the most recent fiscal year payment was SGD0.34. Doing the maths, this is a decline of about 1.6% per year. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Keppel May Find It Hard To Grow The Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. However, Keppel's EPS was effectively flat over the past five years, which could stop the company from paying more every year. Slow growth and a high payout ratio could mean that Keppel has maxed out the amount that it has been able to pay to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Keppel's payments, as there could be some issues with sustaining them into the future. The payments are bit high to be considered sustainable, and the track record isn't the best. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Keppel has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. 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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