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SBS Transit Ltd (SGX:S61) will increase its dividend from last year's comparable payment on the 13th of May to SGD0.231. This makes the dividend yield 7.2%, which is above the industry average.
Estimates Indicate SBS Transit's Could Struggle to Maintain Dividend Payments In The Future
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, SBS Transit was paying out quite a large proportion of both earnings and cash flow, with the dividend being 290% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.
EPS is set to fall by 2.9% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 147%, which is definitely a bit high to be sustainable going forward.
Check out our latest analysis for SBS Transit
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 SGD0.0215 in 2015, and the most recent fiscal year payment was SGD0.203. This means that it has been growing its distributions at 25% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
The Dividend's Growth Prospects Are Limited
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. In the last five years, SBS Transit's earnings per share has shrunk at approximately 2.9% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
The Dividend Could Prove To Be Unreliable
In summary, while it's always good to see the dividend being raised, we don't think SBS Transit's payments are rock solid. The payments are bit high to be considered sustainable, and the track record isn't the best. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for SBS Transit (1 is significant!) that you should be aware of before investing. Is SBS Transit not quite the opportunity you were looking for? Why not check out our selection of top 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.