To The Moon

United Overseas Bank Limited($UNITED OVERSEAS BANK LIMITED(U11.SI)$ ) has announced that it will be increasing its dividend on the 13th of May to S$0.60. This takes the annual payment to 3.7% of the current stock price, which is about average for the industry.

United Overseas Bank's Payment Has Solid Earnings Coverage

Solid dividend yields are great, but they only really help us if the payment is sustainable. Prior to this announcement, United Overseas Bank's earnings easily covered the dividend, but free cash flows were negative. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Looking forward, earnings per share is forecast to rise by 12.8% over the next year. If the dividend continues on this path, the payout ratio could be 47% by next year, which we think can be pretty sustainable going forward.

SGX:U11 Historic Dividend February 21st 2022Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was S$0.60 in 2012, and the most recent fiscal year payment was S$1.20. This implies that the company grew its distributions at a yearly rate of about 7.2% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

The Dividend Has Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see United Overseas Bank has been growing its earnings per share at 5.6% a year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

Our Thoughts On United Overseas Bank's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While United Overseas Bank is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

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. For example, we've picked out1 warning sign for United Overseas Bankthat investors should know about before committing capital to this stock. If you are a dividend investor, I do not suggest this stock for you.

Source: Simply Wallst