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The board of SBS Transit Ltd (SGX:S61) has announced that it will pay a dividend of SGD0.0558 per share on the 28th of August. This means the annual payment is 4.6% of the current stock price, which is above the average for the industry.
Check out our latest analysis for SBS Transit
SBS Transit's Earnings Easily Cover The Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, SBS Transit's earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.
EPS is set to fall by 5.2% over the next 12 months if recent trends continue. Assuming the dividend continues along recent trends, we believe the payout ratio could be 61%, which we are pretty comfortable with and we think is feasible on an earnings basis.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was SGD0.018 in 2014, and the most recent fiscal year payment was SGD0.112. This implies that the company grew its distributions at a yearly rate of about 20% over that duration. SBS Transit has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
Dividend Growth Is Doubtful
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that SBS Transit's earnings per share has fallen at approximately 5.2% per year over the past five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
SBS Transit's Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about SBS Transit's payments, as there could be some issues with sustaining them into the future. 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. Just as an example, we've come across 3 warning signs for SBS Transit you should be aware of, and 2 of them can't be ignored. 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.