Is Kingsmen Creatives Ltd.'s (SGX:5MZ) 4.9% Dividend Sustainable?

Simply Wall St

Mon, May 20, 2019, 9:24 PM

Dividend paying stocks like Kingsmen Creatives Ltd. (SGX:5MZ) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With Kingsmen Creatives yielding 4.9% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Kingsmen Creatives for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Kingsmen Creatives!

SGX:5MZ Historical Dividend Yield, May 21st 2019

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to be 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 61% of Kingsmen Creatives's profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Kingsmen Creatives paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, Kingsmen Creatives investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Kingsmen Creatives's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Kingsmen Creatives has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was S$0.03 in 2009, compared to S$0.025 last year. The dividend has shrunk at around -1.8% a year during that period. Kingsmen Creatives's dividend hasn't shrunk linearly at -1.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

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? In the last five years, Kingsmen Creatives's earnings per share have shrunk at approximately 15% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

To summarise, shareholders should always check that Kingsmen Creatives's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Kingsmen Creatives has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share are down, and Kingsmen Creatives's dividend has been cut at least once in the past, which is disappointing. In this analysis, Kingsmen Creatives doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend payer.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Kingsmen Creatives stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.

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