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How Sustainable is DBS Group Holdings Ltd’s 3.3% Dividend Yield?

DBS Group Holdings Ltd (SGX: D05) rewarded its shareholders recently when it declared a final ordinary dividend of S$0.60 per share for 2017 in its earnings update. Together with DBS’s interim ordinary dividend of S$0.33 per share, the bank’s full-year ordinary dividend for 2017 came up to S$0.93 per share, a 55% increase from 2016.

At DBS’s last transacted price of S$28.55 per share yesterday, its dividend translates to an attractive trailing yield of 3.3%. The hefty increase in the bank’s dividend made me – and likely many other investors – wonder whether DBS has what it takes to maintain or even grow its dividends in the future. This article will explore the question.

Dividend payout ratio

To gauge the sustainability and potential for growth of DBS’s dividend, I took a look at the dividend pauout ratio. The dividend payout ratio is a comparison between the profit of a company and its dividend. In general, a lower dividend payout ratio indicates that a company has the earnings power to sustain its dividend.

As mentioned earlier, DBS’s dividend in 2017 was S$0.93 per share. In DBS’s latest 2017 annual report, its chief financial officer, Chng Sok Hui, mentioned in her statement to shareholders that she expects the bank to pay a dividend of S$1.20 per share in 2018.

For perspective, DBS achieved earnings per share of S$1.69 for 2017. Dividends of S$0.93 and S$1.20 per share thus translate to payout ratios of 55% and 71%, respectively. These are sustainable payout ratios. As long as the bank can maintain its current earnings in future years, the current dividend per share, and what’s expected for 2018, looks justifiable.

Earnings growth

Another factor to consider is whether a company can maintain or grow its earnings per share. If so, shareholders can have much higher certainty that the company’s annual dividend can be sustained.

There are a few reasons why I believe DBS has the capacity to continue growing its earnings per share over the next few years.

Firstly, the full effects of DBS’s acquisition of the wealth management and retail banking business of ANZ will only be seen in 2018. All else being equal, the addition of the ANZ business should provide a slight boost to the bank’s earnings per share.

Secondly, the outlook for banks in Singapore are generally very positive. Their net interest margins (the difference between a bank’s cost of capital and the interest earned from loans it makes) is expected to continue to rise this year, with the Federal Reserve in the United States expected to raise interest rates another two to three times this year. The loan market in Singapore is also very strong, as the en-bloc fever and a strong economy have contributed to broad-based loan growth.

Finally, DBS’s 50-year track record of growing its earnings in good times and bad is a testament to the bank’s durability (the bank was established in 1968).

The Foolish bottom line

With the big increase in DBS’s dividend in 2017, shareholders may be understandably concerned with whether the bank’s dividend can be sustained. Fortunately, with the bank’s low dividend payout ratio and solid earnings outlook, I am confident that the bank will be able to comfortably achieve its 2018 dividend target, barring any unforeseen circumstances.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings.