Sembcorp Industries (SGX:U96) Is Increasing Its Dividend To SGD0.17

Sembcorp Industries Ltd (SGX:U96) has announced that it will be increasing its dividend from last year's comparable payment on the 13th of May to SGD0.17. The payment will take the dividend yield to 3.8%, which is in line with the average for the industry.

View our latest analysis for Sembcorp Industries

Sembcorp Industries' Payment Could Potentially Have Solid Earnings Coverage

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Based on the last payment, Sembcorp Industries' earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

The next year is set to see EPS grow by 17.4%. Assuming the dividend continues along recent trends, we think the payout ratio could be 33% by next year, which is in a pretty sustainable range.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was SGD0.10 in 2015, and the most recent fiscal year payment was SGD0.23. This means that it has been growing its distributions at 8.7% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Sembcorp Industries might have put its house in order since then, but we remain cautious.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Sembcorp Industries has grown earnings per share at 31% per year over the past five years. Sembcorp Industries is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Sembcorp Industries' payments are rock solid. While Sembcorp Industries is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Sembcorp Industries (of which 1 shouldn't be ignored!) you should know about. Is Sembcorp Industries not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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