Most investors would associate growth shares with fast growing companies that retain most of their earnings due to the need for funds to fuel future business expansion. As a result, it’s common to assume that growth shares have low pay-out ratios, defined as a company’s dividends divided by its earnings. But, there are actually growth shares that buck the trend. The following three shares have been growing their earnings at annualised rates of at least 12% over their last five completed financial years and yet sport pay-out ratios of more than 40%. Investors in those companies would thus be…
Most investors would associate growth shares with fast growing companies that retain most of their earnings due to the need for funds to fuel future business expansion. As a result, it’s common to assume that growth shares have low pay-out ratios, defined as a company’s dividends divided by its earnings.
But, there are actually growth shares that buck the trend. The following three shares have been growing their earnings at annualised rates of at least 12% over their last five completed financial years and yet sport pay-out ratios of more than 40%.
Investors in those companies would thus be able to enjoy the benefits of both capital appreciation stemming from earnings growth as well as growing dividends due to the high pay-out ratio. Let’s take a look at them.
1. Vicom (SGX: V01) – Price: $4.71, Price-Earnings (PE) Ratio: 15.5, Dividend Yield: 3.9%
Vicom’s a company that should be familiar with most drivers in Singapore. It runs seven out of nine vehicle inspection centres around our island-nation where mandatory annual inspections are carried out for vehicles here.
In addition, the company also provides testing and inspection services to a wide variety of different industries, such as construction, food and chemicals.
From 2008 to 2012, Vicom’s earnings-per-share (EPS) growth has clocked in at an annualised rate of 12.6%. The increase in EPS would likely have served as the back-bone for the 162% growth in its share price from $1.80 at the start of 2008 to 8 July 2013’s close at $4.71.
Vicom’s pay-out ratio has been at least 50% over its last five completed financial years, as seen in the chart below, and is currently at 61%. According to Vicom’s 2011 Annual Report, it has a dividend policy of maintaining a pay-out ratio of at least 50%. So, investors in the company will benefit directly from any possible future earnings growth through fatter dividends.
2. Super Group (SGX: S10) – Price: $4.47, PE Ratio: 29.8, Dividend Yield: 1.6%
Super Group’s an instant beverage manufacturer, with brands like Super Coffee, White Coffee and Owl 3-in-1 Instant Coffee to name but a few. Besides that, it also has substantial interests in the production and selling of ingredients that are used in Super Group’s and other Food & Beverage manufacturers’ products.
The ingredients business has been growing like a wild fire, with revenues rocketing by close to 5400% from $3m in 2007 to $164m in 2012. That has helped fuel the company’s stupendous EPS growth rate of 33.6% per year from 2008 to 2012. Super Group’s share price has since responded to those great corporate results, jumping by 473% to $4.47 over five-and-a-half years from Jan 2008 to 8 July 2013.
Super Group’s pay-out ratio was at 34% at its lowest between 2008 and 2012, and has since increased to the neighbourhood of around 50%, as seen from the chart below.
The company’s management has stated a commitment to maintain a pay-out ratio of at least half of its earnings in its latest 2012 Annual Report. So, like with Vicom, investors in Super Group will be able to enjoy markedly higher dividends if the company is able to achieve corporate results in the future that are similar to its past.
3. Raffles Medical Group (SGX: R01) – Price: $3.13, PE Ratio: 29.1, Dividend Yield: 1.4%
The healthcare provider operates Raffles Hospital in Singapore along with a host of medical centres scattered throughout the island. RMG’s also tapping into the trend of an aging population in China by running four medical centres in the country with one in Shanghai and three in Hong Kong.
Due to the defensive characteristics of the healthcare industry, RMG’s growth was not impeded even during the Great Financial Crisis of 2007-2009 as its revenues grew from $134m in 2006 to $201m in 2008. And from there on, the company has gone from strength to strength, with EPS growing at a clip of 14.6% per year from 2008 to 2012.
Those corporate results laid the foundation for RMG’s eventual share price growth of 110% from $1.49 at the start of Jan 2008 to $3.13 on 8 July 2013.
Unlike the previous two companies, RMG does not have a dividend policy where management has set certain boundaries for the pay-out ratio. Instead, RMG’s management merely “monitors the levels of dividends to ordinary shareholders,” according to its annual reports. The dividend-monitoring is just part of the company’s policy of capital management, where there’s also a focus on maintaining a robust capital base as well as adequate return on equity.
In any case, RMG’s pay-out ratio has hovered between 40% and 43% for the years 2008 to 2012 (as seen in the chart below), suggesting that investors might stand a high chance of receiving dividends that increases in-line with the company’s EPS growth in the future.
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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 Super Group.