It Might Be Better To Avoid Keppel REIT's (SGX:K71U) Upcoming 1.1% Dividend

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Keppel REIT (SGX:K71U) stock is about to trade ex-dividend in 4 days time. You can purchase shares before the 22nd of July in order to receive the dividend, which the company will pay on the 27th of August.

Keppel REIT's next dividend payment will be S$0.014 per share. Last year, in total, the company distributed S$0.056 to shareholders. Calculating the last year's worth of payments shows that Keppel REIT has a trailing yield of 4.4% on the current share price of SGD1.27. 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 Keppel REIT

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Keppel REIT distributed an unsustainably high 192% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. It's not unusual to see REITs distributing all of their income to shareholders. Yet a payout ratio this high we feel is still cause for concern as it suggests the dividend is being funded from cash on the balance sheet, or by borrowing. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 192% 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 Keppel REIT'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?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Keppel REIT's earnings per share have fallen at approximately 27% a year over the previous 5 years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Keppel REIT has seen its dividend decline 4.4% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Keppel REIT an attractive dividend stock, or better left on the shelf? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (192%) and cash flow (192%) as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Wondering what the future holds for Keppel REIT? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.