Here's Why We're Wary Of Buying Genting Singapore's (SGX:G13) For Its Upcoming Dividend

It looks like Genting Singapore Limited (SGX:G13) is about to go ex-dividend in the next three days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Genting Singapore's shares before the 27th of August in order to receive the dividend, which the company will pay on the 22nd of September.

The company's next dividend payment will be S$0.02 per share, on the back of last year when the company paid a total of S$0.04 to shareholders. Last year's total dividend payments show that Genting Singapore has a trailing yield of 6.1% on the current share price of S$0.655. If you buy this business for its dividend, you should have an idea of whether Genting Singapore's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Genting Singapore paid out 155% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether Genting Singapore generated enough free cash flow to afford its dividend. It paid out an unsustainably high 356% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Genting Singapore does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Cash is slightly more important than profit from a dividend perspective, but given Genting Singapore's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Check out our latest analysis for Genting Singapore

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Genting Singapore's earnings have been skyrocketing, up 35% per annum for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we think is sustainable, based on current earnings. Generally, when a company is paying out more than it earned as dividends, it could signal either that the company is spending heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Genting Singapore has lifted its dividend by approximately 10% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Genting Singapore? While it's nice to see earnings per share growing, we're curious about how Genting Singapore intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Bottom line: Genting Singapore has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Genting Singapore don't faze you, it's worth being mindful of the risks involved with this business. We've identified 2 warning signs with Genting Singapore (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.