Multi-Chem Limited (SGX:AWZ) has announced that it will pay a dividend of SGD0.142 per share on the 23rd of May. This means the annual payment is 9.4% of the current stock price, which is above the average for the industry.

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Multi-Chem's Projected Earnings Seem Likely To Cover Future Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Multi-Chem was paying out 80% of earnings, but a comparatively small 74% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS could expand by 28.1% if recent trends continue. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 73% which brings it into quite a comfortable range.

Check out our latest analysis for Multi-Chem

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2015, the dividend has gone from SGD0.0216 total annually to SGD0.266. This works out to be a compound annual growth rate (CAGR) of approximately 29% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Multi-Chem Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Multi-Chem has grown earnings per share at 28% per year over the past five years. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Multi-Chem hasn't been doing.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. 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. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Multi-Chem that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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