A Look At Sembcorp Industries Limited’s Dividend From 3 Important Investing Angles

Sembcorp Industries Limited (SGX: U96) is a company that has consistently paid an annual dividend over its last 10 fiscal years.

This raises the question: Can Sembcorp Industries sustain its dividend in the future?

Unfortunately, there is no easy answer. There is no simple calculation that can tell investors for sure if a company is able to maintain or grow its dividends in the years ahead.

But, there are still some things about a company’s business we can look at for clues. Here are three of them, keeping in mind that they are not the only important aspects: (1) the company’s profit history, (2) the company’s pay-out ratio, and (3) the strength of the company’s balance sheet.

Profit history

A company’s profits are an important source of its dividends. What I’m interested to find out is if Sembcorp Industries has seen any losses or large drops in profit over the past five years:

Source: S&P Global Market Intelligence

Sembcorp Industries had seen its profit suffer only small haircuts in some years from 2011 to 2014. But, 2015 was a bad year for the company as its bottom-line fell by over 30%.

The pay-out ratio

The pay-out ratio is the percentage of a company’s profit that is paid out as a dividend.

There are two related things to keep in mind in general with the pay-out ratio. First, pay-out ratios should be less than 100%; it’s tough for a company to sustain its dividend if it’s paying out all its profit. Second, the lower the ratio is, the better it could be; a low pay-out ratio means a company has more room for error in maintaining its dividend.

Sembcorp Industries has trailing earnings per share of S$0.189 and a trailing dividend of S$0.10 per share. This gives the company a pay-out ratio of 53%. It’s also worth noting that the company’s dividend in the first-half of 2016 is 20% lower than the previous year.

Strength of the balance sheet

In general, a strong balance sheet (one that is not weighed down by lots of debt) gives a company higher odds of being able to weather through any storms and protect its dividend.

To gauge the strength of a company’s balance sheet, there are many things we can look at. But in here, let’s turn to the net-debt to shareholder’s equity ratio, where net-debt refers to total borrowings and capital leases net of cash and short-term investments. A ratio of over 100% would mean that a company’s net-debt outweighs its shareholder’s equity.

In the case of Sembcorp Industries, its latest financials show that it has a net-debt to shareholder’s equity ratio of 106%.

A Fool’s take

To sum up, Sembcorp Industries is a company with a volatile profit history and a balance sheet with a net-debt to equity ratio of 106%. But, its pay-out ratio is still less than 100%.

The company is facing significant headwinds in its business at the moment, especially in its offshore & marine engineering segment. The sharp decline in the price of oil in the past two years has taken its toll on that part of Sembcorp Industries’ buisness.

In any case, what we’ve seen with Sembcorp Industries here should not be taken as the final word on its investing merits – as I had mentioned earlier, there are many other aspects of the company’s business to study when it comes to assessing the sustainability of its dividend.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.