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Would Higher Dividends Be On The Playing Cards for Genting Singapore?

Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), is made out of 30 different companies and all of them pay dividends. But, there’s a wide disparity in terms of yield among the index’s constituents with casino and resort operator Genting Singapore (SGX: G13) having one of the lowest yields in that group of 30.

The company last paid out a dividend of S$0.01 in 2012, giving its shares a historical dividend yield of 0.7% based on its current price of S$1.345. In contrast, the Straits Times Index is carrying a yield of around 2.8% based on data provided by the index’s tracker, the SPDR Straits Times Index ETF (SGX: ES3).

With Genting due for a release of its full-year earnings results for 2013 on 20 Feb 2014, could higher dividends be on the cards soon?

In the company’s 2012 annual report, Genting’s management wrote about how they view dividends as part of the company’s overall capital management policy:

[Genting’s] objectives when managing capital are to safeguard [its] ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. [Here, “capital’’ is defined as] all components of equity.

In order to maintain or adjust the capital structure, [the company] may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.

Consistent with others in the industry, [Genting] monitors capital based on a gearing ratio. This ratio is calculated as total debt divided by total capital. Total debt is calculated as total borrowings (including ‘current and non-current borrowings’ and ‘finance leases’ as shown in the statement of financial position). Total capital is calculated as equity attributable to ordinary shareholders of the company and perpetual securities holders plus total debt.

[The company’s] strategy in 2012, which was unchanged from 2011, was to maintain the gearing ratio below 66%.”

Given this backdrop, we can see how Genting’s gearing ratio would be at the forefront of management’s concern. The table below shows how the company’s gearing has changed over the years and we can see that its current gearing ratio is way below its self-imposed 66% limit.

Financial Year

Gearing Ratio

2008

32%

2009

48%

2010

41%

2011

34%

2012

23%

Last 12 months

20%

Source: S&P Capital IQ; Genting Singapore’s annual reports

The company has a very short history of paying out dividends. It declared its first dividend of S$0.01 per share only in 2011 and followed that up with its pay-out of S$0.01 in 2012, as mentioned previously. In both years, its pay-out ratio (the percentage of earnings paid out as dividends) has been below 20%, suggesting Genting’s earning more than enough to cover its dividend.

A comparison of the company’s free cash flow with its cash dividends paid also shows that the company has ample wriggle room to maintain or even increase its dividend.

2011

2012

Last 12 months

Pay-out ratio

12.5%

17.9%

Free cash flow

S$118m

S$380m

S$394m

Cash dividends paid

S$122m

S$122m

*Dividends declared for 2011 are paid in 2012; dividends declared in 2012 are paid in 2013 and so on.

Source: S&P Capital IQ

Over the past nine months ended 30 Sep 2013, Genting Singapore has seen its revenue decline 1% year-on-year to S$2.15b while profits improved by 4% to S$538m. In that period, the company’s top-line had dropped a little due to a lower win percentage in its gaming business, but it also managed to expand its revenue base in the non-gaming segments and improve its profitability.

If we put it all together – 1) the company’s low gearing ratio, 2) the company’s low pay-out ratio, and 3) the company’s increase in profits over the past 9 months – it would seem that Genting does have room to increase its dividend, especially if its earnings growth continues in the fourth quarter of 2013 and the company decides to bump up its pay-out ratio.

But of course, nothing’s for sure now and investors will only get a definite answer when Genting Singapore reports its full year results over the next few weeks.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.