Kuala Lumpur Kepong Berhad (KLSE: KLK) will increase its dividend on March 1 to RM 0.80. This brings the dividend yield from 4.6% to 4.6%, which shareholders will be delighted with.

See our latest review for Kuala Lumpur Kepong Berhad

Kuala Lumpur Kepong Berhad dividend well covered by earnings

A high dividend yield for a few years doesn’t mean much if it can’t be sustained. Prior to this announcement, Kuala Lumpur Kepong Berhad’s dividend was only 48% of earnings, but it paid 549% of free cash flow. This indicates that the company is focusing more on returning cash flow to shareholders, but it could mean that the dividend is exposed to reductions in the future.

Going forward, earnings per share are expected to fall 37.4% over the next year. If recent dividend trends continue, we could see the payout ratio reach 79% over the next 12 months, which is in the upper end of what we would say sustainable.

Dividend volatility

The company has a long history of dividends, but it doesn’t look good with the cuts of the past. The dividend went from RM 0.60 in 2012 to the most recent annual payment of RM 1.00. This implies that the company has increased its distributions at an annual rate of approximately 5.2% over that period. It’s good to see the dividend growing at a decent rate, but the dividend has been reduced at least once in the past. Kuala Lumpur Kepong Berhad may have cleaned up since then, but we remain cautious.

The dividend has growth potential

Growth in earnings per share could be a mitigating factor considering past dividend fluctuations. It is encouraging to see that Kuala Lumpur Kepong Berhad has increased its earnings per share by 7.0% per year over the past five years. The company pays out a lot of its cash as dividends, but that looks correct based on the payout ratio.

Our thoughts on the Kuala Lumpur dividend Kepong Berhad

In summary, while it’s always good to see the dividend rise, we don’t think Kuala Lumpur Kepong Berhad’s payouts are strong. With no cash flow, it’s hard to see how the business can support the payment of a dividend. We would be a little cautious if we were relying on this security primarily for dividend income.

Investors generally tend to favor companies with a consistent and stable dividend policy over those that operate irregularly. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a business. Concrete example: we have spotted 2 warning signs for Kuala Lumpur Kepong Berhad (1 of which should not be ignored!) that you should know. We have also set up a list of global stocks with a solid dividend.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.