VICOM Ltd (SGX:WJP) cuts its dividend to S$0.052 on May 25. However, the 4.0% dividend yield is still a good boost for shareholder returns.
Check out our latest analysis for VICOM
VICOM pays more than it earns
While it’s good to have a high dividend yield, we also have to ask ourselves if the payout is sustainable. Prior to this announcement, VICOM’s dividend constituted a very large proportion of earnings and perhaps more concerning was that it represented 122% of cash flow. This is certainly a risk factor, as reduced cash flow could force the company to pay a lower dividend.
Looking ahead, earnings per share are expected to fall 0.6% over the next year. If the dividend continues on recent trends, we estimate the payout ratio could reach 137%, which could put the dividend at risk if the company’s earnings do not improve.
The company’s dividend history has been marked by instability, with at least 1 cut in the past 10 years. Since 2012, the dividend has increased from S$0.035 to S$0.065. This equates to a compound annual growth rate (CAGR) of approximately 6.5% per year during this period. We like to see dividends growing at a reasonable pace, but with at least a substantial reduction in payouts, we’re not sure this dividend stock would be ideal for someone who intends to live on income.
Dividend growth prospects are limited
With a relatively volatile dividend, it is even more important to assess whether earnings per share are increasing, which could indicate dividend growth in the future. VICOM has seen its earnings per share fall by 2.5% per year over the past five years. If earnings continue to decline, the company may have to make the difficult choice of cutting the dividend or even stopping it altogether – the opposite of dividend growth.
Dividend could prove unreliable
Overall, the dividend seems to have been a bit high, which is why it has now been reduced. Payouts are a bit high to be considered sustainable, and the track record isn’t the best. We would probably look elsewhere for an income investment.
Market movements testify to the valuation of a consistent dividend policy over a more unpredictable one. Yet investors must consider a host of other factors, aside from dividend payments, when analyzing a company. Example: we have identified 2 warning signs for VICOM (of which 1 does not suit us too much!) that you should know. If you are a dividend investor, you can also consult our curated list of high yielding dividend stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.