Keppel Corporation Limited (SGX: BN4) had a tough year in 2016. It recorded a 34.3% decline in revenue and its profit was almost halved. The rough results had affected Keppel Corporation’s investors: The company’s stock price declined by around 12% in 2016 and the company’s dividend was cut by 41% from 34 cents per share in 2015 to 20 cents per share. Naturally, there were some questions from analysts about this big cut during Keppel Corporation’s 2016 fourth quarter earnings presentation. The company’s chief executive, Loh Chin Hua, was on hand to provide four key thoughts. Sharing in good times and…
Keppel Corporation Limited (SGX: BN4) had a tough year in 2016.
It recorded a 34.3% decline in revenue and its profit was almost halved. The rough results had affected Keppel Corporation’s investors: The company’s stock price declined by around 12% in 2016 and the company’s dividend was cut by 41% from 34 cents per share in 2015 to 20 cents per share.
Naturally, there were some questions from analysts about this big cut during Keppel Corporation’s 2016 fourth quarter earnings presentation. The company’s chief executive, Loh Chin Hua, was on hand to provide four key thoughts.
Sharing in good times and bad times
In the presentation, Loh reiterated Keppel Corporation’s credo on dividends. He shared that management is aware of expectations when it comes to dividends. Loh said:
“This is fair, because a lot of our shareholders of Keppel are income funds, so they look at dividend as a very important part of the total returns. This is also something that the Board of Keppel Corp is very well aware of.
When we decide the total dividend for the whole year, we consider several factors. The first factor is that it is a sharing. We have always said that when we do well, we want to share with our stakeholders.”
To be sure, sharing goes both ways. In difficult times, like in 2016, Keppel Corporation has to dial back on its dividend payouts. Investors might have to wait for better times to come before the company’s dividends are increased.
The dividend ‘policy’
Keppel Corporation does not have a formal dividend policy, but it looks closely at its profit when deciding on how much dividend it would distribute to shareholders. Loh explained:
“In that regard, we don’t have an explicit policy, but you can see from the recent dividend that we have set is somewhere between 40-50% of our net profits for the year. At 20 cents this year, it is about 46%, slightly higher than the mid-range.”
The conglomerate’s profit was down some 48% in 2016 while its dividend was cut by around 41%, as already mentioned.
Keppel Corporation’s Offshore and Marine business segment was hit hard in 2016 as it contributed only $29 million in net profit, down a stunning 94% from 2015. A big part of the decline had come from impairments made and right-sizing efforts at the segment. For context, Keppel Corporation, as a whole, made almost $784 million in net profit for 2016.
The sustainability of the dividend
Keppel Corporation also said that its dividend has to be sustainable. Loh elaborated:
“The second factor is to make sure that whatever dividend we set is what we believe is sustainable. On that basis we are comfortable in recommending to our shareholders a final dividend of 12 cents, which will then make it 20 cents for the whole year.”
To be sure, Keppel Corporation believes that a sustainable dividend rate would be around 40% to 50% of its net profit. This is different from saying that Keppel Corp believes a certain dollar amount of dividend is sustainable (more on this below).
No promises from a cyclical industry
Loh was asked whether Keppel Corporation’s dividend can be sustained at 20 cents per share. He answered:
“Based on what we see today, this is something we can afford to pay. Of course, the conditions this year and next year may change. We will make the evaluation when we come to the same period next year, and it will depend on the Group’s capital requirements and the market at that point in time.”
Investors in Keppel Corporation should be aware that the conglomerate’s Offshore and Marine segment operates in an industry that is cyclical in nature. The conglomerate is going through lean times at the moment. If conditions change for the better or for the worse, its dividend could benefit or suffer by roughly the same degree.
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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 writer Chin Hui Leong doesn't own shares in any company mentioned.