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Three Dividend Shares with Healthy Yields

Money treeDividends from shares are a precious source of income for investors. But, these dividends have to be sustainable, or else a dividend that looks attractive now might just result in heartbreak in the future.

Generally, there’re a few simple financial figures we could look at in a company’s shares for some clues about how healthy its dividends and its business are, namely:

  • Dividends per share: A growing dividend would mean an increasing income, so that’s naturally a plus.
  • Earnings per share: A business that can churn out higher per-share profits over time would make its shares increase in value steadily, so that’s a definite-positive for shareholders.
  • Free Cash Flow per share: Positive and growing Free Cash Flow tells us that a business can generate actual, excess cash from its operations (something that is distinct from accounting-profit). This excess cash can then be used to fund share repurchases, make acquisitions to grow the business, or to strengthen the balance sheet among other uses.
  • Cash and Debt Levels: Businesses go bankrupt when they get crushed by heavy debt-loads. Hence, it always pays to cast an eye on the levels of cash and debt that a business carries on its balance sheet. Simply speaking, having more cash on hand than debt is a sign of a financially stable business.

Let’s take a look at some shares which sport the characteristics described above as well as a dividend yield higher than the Straits Times Index‘s (SGX: ^STI) 2.9%

Kingsmen Creatives (SGX: 5MZ) is up first. A relatively tiny company with a market value just south of S$170m, its main interests lie in the design, manufacture and setting up of installations for exhibitions, museums, theme parks, retail stores etc.

The clientele for Kingsmen includes illustrious brands like BMW, Fendi, Tiffany & Co., Chanel and Tag Heuer among many others. The company has also been involved with diverse exhibitions and museums. Some notable examples include the Seoul International Aerospace & Defense Exhibition in Korea and Andy Warhol: 15 Minutes Eternal in the ArtScience Museum in Singapore.

The table below shows the company’s financial figures for its last five financial years with all the right boxes ticked – Kingsmen’s shares have displayed growing dividends, earnings and free cash flow coupled with very high levels of cash relative to debt. Shares of the company are currently selling at S$0.875, with a Price-Earnings ratio of 9.7 and dividend yield of 4.6%.

Kingsmen Creatives

2008

2009

2010

2011

2012

Dividends Per Share (cents)

3

3.5

3.5

4

4

Earnings Per Share (cents)

7.46

7.87

7.93

8.56

8.94

Free Cash Flow Per Share (cents)

7.66

0.01

7.46

5.54

14.80

Cash (in millions)

28.2

22.8

29.9

33.2

53.1

Debt (in millions)

1.4

1.3

5.3

5.2

4.6

*Free Cash Flow is defined as Cash Flow from Operations minus Purchase of Plant, Property & Equipment.
*All Per-Share figures are calculated using the undiluted share count.

Next, we have Japan Foods Holding (SGX: 5OI). The company might not ring a bell for most, but Japanese ramen lovers might be very familiar with the restaurants they operate, which includes Ajisen Ramen and Menya Musashi to name but a few.

Japan Foods first floated on the Catalist stock exchange back in Feb 2009 at an offer price of S$0.167 per share (adjusted for a 1-for-5 bonus share issue in 2011). At that time, it had a total of 32 outlets offering different types of Japanese cuisine in Singapore, Malaysia and Indonesia. Four years later, the company has since expanded to Vietnam and now operates 57 outlets. Along the way, shareholders have been rewarded greatly with a share price that has appreciated by 2.5 times to S$0.58.

With a massive dividend growth of 1370% from March 2009 to March 2013 (as per the table below); growing earnings and free cash flow; and a balance sheet that carried either negligible or no debt; its shares seem to display all the right signs.

At its current share price, Japan Foods is selling for 10.5 times earnings and sport a dividend yield of 4.3%

Japan Foods

2008

2009

2010

2011

2012

Dividends Per Share (cents) 0.17 0.5 0.67 1.05 2.5
Earnings Per Share (cents) 3.06 4.32 2.24 3.22 5.55
Free Cash Flow Per Share (cents) -2.82 2.37 -0.50 4.78 7.31
Cash (in millions) 6.4 10.4 9.6 13.6 18.8
Debt (in millions) 1.5 3.1 1.4 0.3 0
*Free Cash Flow is defined as Cash Flow from Operations minus Purchase of Plant, Property & Equipment.*All Per-Share figures are calculated using the undiluted share count.

*Japan Foods’ financial years start and end on March. In this table, ‘2008’ would equate to the financial year ending March 2009, ‘2009’ would mean the financial year ending March 2010, so and so forth.

*Financial figures for 2008-2010 have been adjusted for a 1-for-5 bonus share issue that occurred during 2011.

Last on the list is SIA Engineering (SGX: S63). The company’s main business is to help maintain, repair and overhaul aircrafts for more than 80 airlines around the world. And again, we see growing dividends, steady profitability and negligible debt in the table below, signalling a thumbs-up in all the right places.

SIA Engineering is a subsidiary of Singapore Airlines (SGX: C6L), but it does not display any of the notorious cyclicality in business-results that comes with the territory for airlines. Indeed, the engineering firm’s profits have marched steadily upwards over the past 10 years – it earned S$270.1m in the financial year ended March 2013, almost doubling its profit of S$139.9m in March 2004.

With its current share price of $5.00, SIA Engineering’s shares carry a PE ratio of 20.4 and a dividend yield of 4.4%.

SIA Engineering

2008

2009

2010

2011

2012

Dividends Per Share (cents) 16 18 30 21 22
Earnings Per Share (cents) 24.20 21.88 23.77 24.56 24.51
Free Cash Flow Per Share (cents) 1.20 6.51 15.96 9.69 9.20
Cash (in millions) 372.5 425.8 581.4 497.9 522.9
Debt (in millions) 0.9 0.0 1.7 2.4 8.0
*Free Cash Flow is defined as Cash Flow from Operations minus Capital Expenditures.
*All Per-Share figures are calculated using the undiluted share count.
*SIA Engineering’s financial years start and end on March. In this table, ‘2008’ would equate to the financial year ending March 2009, ‘2009’ would mean the financial year ending March 2010, so and so forth.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Kingsmen Creatives and Japan Foods Holding.