Stable Dividend Yield at PETRONAS Dagangan Berhad, but Limited Growth Potential

PETRONAS Dagangan Berhad plans to increase the dividend to MYR0.24 on December 24, representing a raise compared to the previous year. This brings the dividend yield to 4.1% of the current stock price, yet it remains below the industry average. While a higher yield would be ideal for shareholders, it is equally crucial to consider the sustainability of the distributions. Before the current announcement, the payout ratio was 87% of earnings and 47% of free cash flow, indicating a solid foundation for future dividends. It is important here that the cash flow is largely available for reinvestment. Earnings growth forecasts predict a growth of 3.8% next year. If the current dividend strategy is maintained, the payout ratio could drop to 86%, which still seems feasible. The company's dividend policy has been characterized by instability in the past, with at least one cut in the last ten years. In 2014, the annual dividend was MYR0.70, while it rose to MYR0.80 in the last fiscal year, corresponding to an average annual growth of 1.3%. This development has led to a limited total return for shareholders. Given the history of dividend cuts, it is important to evaluate whether earnings can continue to grow and lead to stronger dividends. Although the company has managed to increase earnings by 6.3% annually over the past five years, the prospect for more significant dividend growth is limited due to the high payout ratio. In conclusion, dividend increases are fundamentally positive, but PETRONAS Dagangan Berhad currently does not offer compelling prospects as an income stock. The short-term coverage of the dividend by cash flow remains stable, but larger growth opportunities are limited. For investors focusing on stable income, PETRONAS Dagangan Berhad may thus appear less attractive.