Saudi Basic Industries (TADAWUL:2010) Will Pay A Smaller Dividend Than Last Year

Saudi Basic Industries Corporation (TADAWUL:2010) has announced it will be reducing its dividend payable on the 2nd of October to SAR1.80, which is 20% lower than what investors received last year for the same period. However, the dividend yield of 4.8% still remains in a typical range for the industry.

Check out our latest analysis for Saudi Basic Industries

Saudi Basic Industries’ Payment Has Solid Earnings Coverage

We aren’t too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Saudi Basic Industries’ dividend was higher than its profits, but the free cash flows quite comfortably covered it. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Over the next year, EPS is forecast to expand by 73.5%. If the dividend continues along recent trends, we estimate the payout ratio will be 59%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

The company has a long dividend track record, but it doesn’t look great with cuts in the past. Since 2013, the dividend has gone from SAR5.00 total annually to SAR4.25. The dividend has shrunk at around 1.6% a year during that period. Declining dividends isn’t generally what we look for as they can indicate that the company is running into some challenges.

Dividend Growth Potential Is Shaky

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. Saudi Basic Industries’ EPS has fallen by approximately 11% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

The Dividend Could Prove To Be Unreliable

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 don’t think Saudi Basic Industries is a great stock to add to your portfolio if income is your focus.

It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we’ve picked out 2 warning signs for Saudi Basic Industries that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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