Keppel Ltd. (SGX:BN4) has announced that it will pay a dividend of SGD0.19 per share on the 9th of May. This makes the dividend yield 5.0%, which will augment investor returns quite nicely.

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Keppel's Future Dividend Projections Appear Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. This is a pretty unsustainable practice, and could be risky if continued for the long term.

The next year is set to see EPS grow by 43.5%. If the dividend continues on this path, the payout ratio could be 50% by next year, which we think can be pretty sustainable going forward.

SGX:BN4 Historic Dividend April 2nd 2025

View our latest analysis for Keppel

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the annual payment back then was SGD0.42, compared to the most recent full-year payment of SGD0.34. Doing the maths, this is a decline of about 2.1% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth May Be Hard To Achieve

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. However, Keppel has only grown its earnings per share at 3.4% per annum over the past five years. Slow growth and a high payout ratio could mean that Keppel has maxed out the amount that it has been able to pay to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

In Summary

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Keppel's payments, as there could be some issues with sustaining them into the future. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Keppel has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Is Keppel not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.