Multi-Chem Limited's (SGX:AWZ) dividend will be increasing from last year's payment of the same period to SGD0.111 on 26th of May. This will take the dividend yield to an attractive 9.9%, providing a nice boost to shareholder returns.

Check out our latest analysis for Multi-Chem

Multi-Chem's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. At the time of the last dividend payment, Multi-Chem was paying out a very large proportion of what it was earning and 148% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

EPS is set to grow by 12.8% over the next year if recent trends continue. If recent patterns in the dividend continue, the payout ratio in 12 months could be 89% which is a bit high but can definitely be sustainable.

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 2013, the annual payment back then was SGD0.044, compared to the most recent full-year payment of SGD0.177. This works out to be a compound annual growth rate (CAGR) of approximately 15% 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. Multi-Chem has seen EPS rising for the last five years, at 13% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Multi-Chem will make a great income stock. Strong earnings growth means Multi-Chem has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would be a touch cautious of relying on this stock primarily for the dividend income.

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 1 warning sign for Multi-Chem that investors should know about before committing capital to this stock. 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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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.

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