Don't Race Out To Buy Singapore Technologies Engineering Ltd (SGX:S63) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Singapore Technologies Engineering Ltd (SGX:S63) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Singapore Technologies Engineering investors that purchase the stock on or after the 21st of August will not receive the dividend, which will be paid on the 1st of September.

The company's next dividend payment will be S$0.04 per share, on the back of last year when the company paid a total of S$0.16 to shareholders. Based on the last year's worth of payments, Singapore Technologies Engineering has a trailing yield of 4.1% on the current stock price of SGD3.86. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Singapore Technologies Engineering

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Singapore Technologies Engineering paid out 93% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 130% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Singapore Technologies Engineering's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Singapore Technologies Engineering's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the Singapore Technologies Engineering dividends are largely the same as they were 10 years ago.

To Sum It Up

From a dividend perspective, should investors buy or avoid Singapore Technologies Engineering? Earnings per share are effectively flat, plus Singapore Technologies Engineering's dividend is not well covered by either earnings or cash flow, which is not great. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Singapore Technologies Engineering.

So if you're still interested in Singapore Technologies Engineering despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 2 warning signs for Singapore Technologies Engineering you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.