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The board of Singapore Technologies Engineering Ltd (SGX:S63) has announced that it will be paying its dividend of SGD0.05 on the 15th of May, an increased payment from last year's comparable dividend. This makes the dividend yield 2.8%, which is above the industry average.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Singapore Technologies Engineering's stock price has increased by 51% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.
Singapore Technologies Engineering's Projected Earnings Seem Likely To Cover Future Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Singapore Technologies Engineering's dividend made up quite a large proportion of earnings but only 53% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Over the next year, EPS is forecast to expand by 50.6%. If the dividend continues along recent trends, we estimate the payout ratio will be 53%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Check out our latest analysis for Singapore Technologies Engineering
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of SGD0.16 in 2015 to the most recent total annual payment of SGD0.20. This implies that the company grew its distributions at a yearly rate of about 2.3% over that duration. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
The Dividend's Growth Prospects Are Limited
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. However, Singapore Technologies Engineering has only grown its earnings per share at 4.0% per annum over the past five years. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.