SembCorp Industries Limited’s Latest Earnings: Why Was its Interim Dividend Cut by 25%?
SembCorp Industries Limited (SGX: U96) is a regular dividend payer. But its interim dividend was cut 25% in the latest quarter.
The conglomerate’s revenue comes from its three different business segments: utilities, marine, and urban development & others. The marine segment’s contribution mainly comes from SembCorp Industries’ 61% ownership stake in SembCorp Marine Ltd (SGX: S51).
In SembCorp Industries’ latest earnings results, it reduced its interim dividend per share to three cents, down from four cents a year ago. The management was asked to explain its decision to cut the dividend.
How now, brown cow?
SembCorp Industries recorded a 37.2% decline in net profit for 2017’s second-quarter. The fall in profits came despite the 23.2% sales growth it recorded during the same period. A big part of the decrease was due to the $39.1 million charge that it took to refinance the firm’s loans for SGPL (SembCorp Gayatri Power).
The charge was one-off and would allow SembCorp Industries to reduce its interest expense going forward.
However, a question arose on the nature of the charge. If it was a one-time charge, why reduce the interim dividend?
SembCorp Industries’ Chief Executive Officer, Neil McGregor, said:
“Basically, the answer to that is we have a dividend policy of around about 30% in terms of payout, and we just — because the profit is lower, therefore, the dividend is lower.”
From SembCorp Industries’ website, its dividend policy did not explicitly state that its dividend payout would be at 30% of profits:
“Sembcorp is committed to achieving sustainable income and growth to enhance total shareholder return.
The Group’s policy aims to balance cash return to shareholders and investment for sustaining growth, while aiming for an efficient capital structure. The company strives to provide consistent and sustainable ordinary dividend payments to its shareholders on an annual basis.”
The policy did state that the group will need to balance its need to return cash to shareholders and invest for growth — a point that McGregor highlighted:
“And we also believe, taking a longer-term view, that it’s prudent to conserve cash.
Yes, we understand there’s a balance in terms of shareholders’ desires, but we also must remember that as — if the performance of the company is actually coming off in the cycle, then we also need to conserve cash so that we can invest in the up cycle when it arrives.
There’s no use dividend-ing out everything and not being able to grow in a business going forward. So that’s what management is taking and the board is taking as a prudent step to longer term conservancy of cash.”
For the first half of 2017, SembCorp Industries recorded negative $202.5 million in operating cash flow and negative $558.6 million in free cash flow. At the end of June, the conglomerate had a net debt position of $7.98 billion ($2 billion in cash and cash equivalents together with $2.6 billion in borrowings).
As it stands, SembCorp Industries’ dividend has been slipping since 2014. The dividend payout history is summarised below:
Source: SembCorp Industries’ dividend history
In 2014, SembCorp Industries paid out 16 cents in dividends per share, comprising of a five cent interim dividend and an 11 cent final dividend. As lower oil prices sank in, the conglomerate has had to cut its yearly dividend to 11 cents in 2015, and again to eight cents in 2016.
The latest interim dividend of three cents represents another 25% cut from 2016’s interim dividend of four cents.