Consider This Before Buying Penguin International Limited (SGX:P13) For The 2.8% Dividend

Dividend paying stocks like Penguin International Limited (SGX:P13) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Investors might not know much about Penguin International's dividend prospects, even though it has been paying dividends for the last seven years and offers a 2.8% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. That said, the recent jump in the share price will make Penguin International's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding Penguin International for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Penguin International!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 26% of Penguin International's profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while Penguin International pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

While the above analysis focuses on dividends relative to a company's earnings, we do note Penguin International's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Penguin International every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the data, we can see that Penguin International has been paying a dividend for the past seven years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past seven-year period, the first annual payment was S$0.01 in 2014, compared to S$0.02 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.2% a year over that time. The dividends haven't grown at precisely 2.2% every year, but this is a useful way to average out the historical rate of growth.

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.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? It's not great to see that Penguin International's have fallen at approximately 9.8% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Penguin International has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, Penguin International has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 3 warning signs for Penguin International (of which 1 is concerning!) you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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