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SAM Engineering & Equipment (M) Berhad (KLSE:SAM) has announced it will be reducing its dividend payable on the 18th of August to RM0.11. This means the annual payment is 1.6% of the current stock price, which is above the average for the industry.
See our latest analysis for SAM Engineering & Equipment (M) Berhad
SAM Engineering & Equipment (M) Berhad’s Earnings Easily Cover the Distributions
A big dividend yield for a few years doesn’t mean much if it can’t be sustained. However, prior to this announcement, SAM Engineering & Equipment (M) Berhad’s dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.
EPS is set to fall by 9.7% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 29%, which is definitely feasible to continue.
SAM Engineering & Equipment (M) Berhad’s Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2012, the dividend has gone from RM0.075 to RM0.11. This works out to be a compound annual growth rate (CAGR) of approximately 4.4% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
Dividend Growth Is Doubtful
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. SAM Engineering & Equipment (M) Berhad has seen earnings per share falling at 9.7% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely – the opposite of dividend growth.
In Summary
In summary, dividends being cut isn’t ideal, however it can bring the payment into a more sustainable range. The payments haven’t been particularly stable and we don’t see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we’ve picked out 1 warning sign for SAM Engineering & Equipment (M) Berhad that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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