Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see SIA Engineering Company Limited (SGX:S59) is about to trade ex-dividend in the next 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase SIA Engineering's shares on or after the 9th of November will not receive the dividend, which will be paid on the 29th of November.
The company's next dividend payment will be S$0.02 per share, on the back of last year when the company paid a total of S$0.055 to shareholders. Based on the last year's worth of payments, SIA Engineering has a trailing yield of 2.3% on the current stock price of SGD2.37. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. SIA Engineering paid out more than half (66%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out an unsustainably high 270% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since SIA Engineering is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
SIA Engineering does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While SIA Engineering's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were SIA Engineering to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by SIA Engineering's 13% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. SIA Engineering has seen its dividend decline 13% 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.
The Bottom Line
Is SIA Engineering worth buying for its dividend? SIA Engineering had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think SIA Engineering is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with SIA Engineering. In terms of investment risks, we've identified 1 warning sign with SIA Engineering and understanding them should be part of your investment process.
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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.
