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Could NSL Ltd (SGX:N02) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, NSL likely looks attractive to investors, given its 5.0% dividend yield and a payment history of over ten years. 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 NSL for its dividend, and we'll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on NSL!
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, NSL currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Last year, NSL 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, NSL investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on NSL's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of NSL's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was S$0.20 in 2009, compared to S$0.05 last year. Dividend payments have fallen sharply, down 75% over that time.
A shrinking dividend over a ten-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though NSL's EPS have declined at around 41% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and NSL's earnings per share, which support the dividend, have been anything but stable.