Sembcorp Industries (SGX:U96) Will Pay A Larger Dividend Than Last Year At SGD0.17

The board of Sembcorp Industries Ltd (SGX:U96) has announced that it will be paying its dividend of SGD0.17 on the 13th of May, an increased payment from last year's comparable dividend. Although the dividend is now higher, the yield is only 3.5%, which is below the industry average.

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Sembcorp Industries' Payment Could Potentially Have Solid Earnings Coverage

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before making this announcement, Sembcorp Industries was earning enough to cover the dividend, but it wasn't generating any free cash flows. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Over the next year, EPS is forecast to expand by 23.0%. Assuming the dividend continues along recent trends, we think the payout ratio could be 31% by next year, which is in a pretty sustainable range.

Check out our latest analysis for Sembcorp Industries

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. Since 2015, the annual payment back then was SGD0.10, compared to the most recent full-year payment of SGD0.23. This implies that the company grew its distributions at a yearly rate of about 8.7% over that duration. 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

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Sembcorp Industries has impressed us by growing EPS at 31% per year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Sembcorp Industries could prove to be a strong dividend payer.

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 the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Sembcorp Industries has 2 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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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.