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Can Super Group Ltd. Brew Up A Cup Of Fatter Dividends Soon?

Instant beverage maker Super Group (SGX: S10) has been a huge market beater over the past 10 years since the start of 2004 with shares of the company having appreciated in price by some 795% to S$3.49. In contrast, the Straits Times Index (SGX: ^STI) here in Singapore has gained just 70.5% in the same period.

But that’s not all. If we tack on reinvested dividends to Super Group’s shares, the company’s gains become even more impressive, attaining 10-bagger status with a 1,089% return. This is in no small part due to Super Group’s impressive history of growing dividends. The company’s pay-out has jumped by more than nine-fold from 0.78 Singapore cents per share in 2003 to 7.1 cents in 2012.

Year

Dividends per share (Singapore cents)

2003

0.78

2004

1.20

2005

1.60

2006

1.60

2007

1.60

2008

1.60

2009

2.60

2010

5.40

2011

5.80

2012

7.10

Source: S&P Capital IQ

With a rather impressive track record of dividend growth and with the company due to release its full-year results for 2013 in two weeks’ time on 24 Feb 2014, it might be interesting to ponder the possibility of Super Group reporting a larger annual dividend soon.

Super Group’s in the business of making instant beverages such as coffee, tea, and cereals, under brands that include Super, Owl, Café Nova, and Tea Su Su among others. In addition, the company also manufactures and distributes – for its own use as well as to other food & beverage manufacturers – food ingredients like non-dairy creamer and soluble coffee powder of the spray-dried and freeze-dried variety.

The two different kinds of businesses are segmented by the company under the labels of Branded Consumer sales and Food Ingredient sales, respectively.

Over the first nine months of 2013, Branded Consumer sales took up 68% of the company’s overall revenue of S$404m while Food Ingredient sales accounted for the rest (S$131m). Even though the latter’s still a smaller part of Super Group’s business, it has grown at a breakneck pace over the past few years; in 2010, the Food Ingredient segment clocked in sales of S$58.3m, which has since more than doubled to S$131m in just the first nine months of 2013.

In Super Group’s 2012 annual report, its chairman, managing director, and co-founder, David Teo Kee Bock wrote that “Super is committed to the dividend policy of distributing at least 50% of the [company’s] annual net profit as dividends to shareholders” and this has been so since at least 2010. The company’s pay-out ratio – percentage of earnings paid out as dividends – since 2010 also bears out the fact.

Year

Pay-out ratio

2010

50.7%

2011

52.2%

2012

50.0%

Source: S&P Capital IQ

Of course, the dividends paid by any company does not happen in a vacuum and those cherished pay-outs can often be affected by a company’s capital management policy and capital structure. Super Group’s no exception, as can be seen from the excerpt found in its 2012 annual report that’s laid out below:

The primary objective of [Super Group’s] capital management is to ensure that it maintains a strong credit rating and healthy capital ratios to support its business and maximise shareholder value.

[Super Group] manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the [company] may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares…

…[Super Group] monitors capital using its debt-to-equity ratio as follows: [Total Liabilities divided by Total Equity]”

So, if we put two-and-two together, Super Group’s dividend payments would likely be negatively impacted by a growing debt-to-equity ratio. This how the metric has changed over the past few years:

Year

Debt-to-equity ratio

2010

0.31

2011

0.31

2012

0.30

Last 12 months

0.22

Source: Company’s annual and earnings reports

With the company’s debt-to-equity ratio being lower than it has been over the past three years, any adverse change to its dividend stemming from a deterioration of its balance sheet seems unlikely. Thus, the important driver for dividend growth now would rest on its profits.

The company had declared an interim dividend of S$0.02 per share for the six months ended 30 June 2013, an amount that’s unchanged from the corresponding period in 2012. Over the nine months ended 30 Sep 2013, Super Group has managed to grow its top-line by 11% year-on-year to S$404m with profits actually jumping by 34% to S$77m.

But while that seems like great results, the company’s quarterly figures for the third quarter of 2013 weren’t that fantastic as sales only inched up by 2% year-on-year to S$133m while profits were slashed by 17% to S$18.7m. The company had attributed the profit decline partly to higher administrative, marketing, distribution, selling, and staff costs.

If that trend continues, Super Group might end 2013 with annual profits that grew at a slower pace as compared to what it experienced over the first nine months of the year.

But either way, if Super Group does manage to produce meaningful growth in profits in its upcoming earnings release, it’s likely that investors can look forward to higher annual dividends for 2013 especially if the company decides to maintain or even increase its pay-out ratio.

Nonetheless, it’s also good to point out that nothing’s certain as of this moment, and investors can only be sure of the company’s dividends when it releases its full-year results two weeks later.

At Super Group’s current price of S$3.49 per share, it’s selling for 20 times trailing earnings and carry a historical dividend yield of 2% based on its pay-out for 2012.

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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 owns shares in Super Group.