MENU

Two Shares with the Key to Growing Dividends

Consistently growing dividends are a wonderful thing as it can really help propel an investor’s long-term returns to greater heights. But the thing is, it isn’t that easy to find shares that are able to grow their dividends dependably.

For every Jardine Matheson Holdings (SGX: J36) with a 10-year long track record of consecutive annual dividend growth, there’s also a SMRT Corporation (SGX: S53) whose dividends have shrunk from 4.25 Singapore cents in 2002 to 2.5 Singapore cents in 2013.

So, is all hope lost for investors who are on the look-out for dividend growth? Fortunately, that’s not the case. Though it’s by no means the only important criteria, companies that have a strong history of growing free cash flow could be fertile grounds for unearthing future dividend aristocrats.

With the earnings season nearing its tail-end, here are two shares that have recently reported their latest quarterly results and displayed steady free cash flow growth. In addition, both shares also carry dividend yields that are higher than the market average of around 2.9%, as represented by the Straits Times Index (SGX: ^STI).

1. Riverstone Holdings (SGX: AP4)

The company had just reported its full-year results for 2013 yesterday. Its revenue and profit growth were outstanding as the two figures came in 15.5% and 46.2% higher as compared to 2012. But more importantly, its operating cash flow also jumped by 34.8% to RM80.2 million. With capital expenditures of RM29.5 million in the year, Riverstone ended 2013 with RM50.7 million in free cash flow, some 62.5% higher than 2012.

The company’s free cash flow of RM50.7 million in 2013 also represents a huge jump from the corresponding figure of RM0.40 million it had earned in 2008.

Year

Operating Cash Flow
(in RM, millions)

Capital Expenditures
(in RM, millions)

Free Cash Flow
(in RM, millions)

2008

21.5

21.1

0.40

2009

40.6

26.9

13.7

2010

50.7

42.1

8.60

2011

41.4

28.9

12.5

2012

59.5

28.3

31.2

2013

80.2

29.5

50.7

Source: S&P Capital IQ

Riverstone Holdings manufactures and distributes cleanroom and healthcare gloves (of both the latex and nitrile variety), fingercots, face masks and packaging bags. At its current price of S$0.79, shares of the glove maker are valued at 12.8 times trailing earnings and carry a dividend yield of 3.3% based on its annual dividend of 6.8 sen for 2013.

2. Sarine Technologies (SGX: U77)

Sarine Technologies might very well be a girl’s best friend. That’s because the company plays a crucial role in getting diamonds to look the way they do when encrusted in a ring; it “develops, manufactures, markets and sells precision technology products for the processing of diamonds and gemstones.”

The company’s results were badly affected during the Global Financial Crisis where its profits fell from US$8 million in 2007 to US$1.5 million in 2009. But, Sarine Technologies started increasing the recurrent portions of its revenue profile with the introduction of the GalaxyTM family of products in 2009.

Since then, the total installed base of the GalaxyTM systems has grown to 140 as of 31 Dec 2013, up 47% from an installed base of 95 systems at the end of 2012. With more systems of the GalaxyTM family in place, recurring revenue accounted for 30% of Sarine Technologies’ overall sales in 2013, up from a 25% share in 2012.

This has led to a rebound in Sarine Technologies’ profits to US$23.9 million for 2013 and also helped drive the company’s free cash flow growth significantly along the way.

Year

Operating Cash Flow
(in US$, millions)

Capital Expenditures
(in US$, millions)

Free Cash Flow
(in US$, millions)

2008

1.6

1.7

-0.1

2009

9.7

1.2

8.5

2010

14.4

1.7

12.7

2011

17.1

1.5

15.6

2012

23.2

4.2

19

2013

19.6

7.3

12.3

Source: S&P Capital IQ; Sarine Technologies earnings releases

Sarine Technologies’ shares are worth some S$2.24 apiece currently. At that price, it’s valued at 32 times trailing earnings and carry a dividend yield of around 3.3% based on its full-year dividend of US$0.06 per share for 2013.

Foolish Bottom Line

While it’s important to crunch the numbers and take a look at the hard figures, it’s perhaps even more important to realise that a good display of historical figures is just a signal that a particular share might be worth a much deeper look for its investment merits.

Thus, as good as Riverstone and Sarine Technologies’ history of free cash flow has been, there’s still important work to be done in investigating their businesses before any investing-related conclusion can be made.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

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.