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Three Shares with Healthy Dividends

Growing dividends are great for investors who are looking to build an income portfolio. But, it’s not necessarily right to say that a growing dividend is automatically a good thing for investors without any context given to the strength of the share’s underlying business.

Because of that, it’ll pay to look beneath the hood for dividend-paying companies to determine how healthy their dividends and businesses are. Here are some financial figures we could look at to help us out:

1) Dividends per share: A growing dividend would mean investors are getting greater rewards from their shares the longer they hold on to them.

2) Earnings per share: A company that can grow its per-share earnings over time would be increasing in value steadily, which is beneficial for shareholders.

3) Free cash flow per share: Positive and growing free cash flow tells us that a company’s various businesses are able to generate excess cash from its operations after reinvesting the necessary capital for it to maintain its current market position. The excess cash can then be used for different purposes, such as buying back shares, making acquisitions to grow the company, or to strengthen the balance sheet by letting cash pile up.

4) Cash and debt levels: Generally speaking, a company that can operate profitably while carrying more cash than debt on its balance sheet is in a much stronger financial position as compared to one that isn’t.

Here are three shares that happen to exhibit the kinds of financial characteristics described above.

Sarine Technologies (SGX: U77) comes up first. As a company that designs and produces precision technology products and software for the planning, processing, evaluation, and measurement of diamonds and precious stones, Sarine Technologies derives more than three quarters of its revenue from India. This is also a reflection of how the country accounts for almost 90% of global diamond manufacturing volumes.

Prior to 2009, the company’s revenue came from one-time sales of capital equipment to diamond manufacturers. With the introduction of the Galaxy family of products in 2009, the company started to shift its business model into one with a much larger share of recurring revenue. By the end of 2013, Sarine Technologies had an installed base of “just over” 140 Galaxy family systems and recurring revenue now accounts for almost one third of the company’s total revenue.

Along with the change in the company’s business model came an improvement in its sales, profits, cash flows and balance sheet as seen from its table below. Shares of the company have enjoyed a tremendous run up since the start of 2013 when it was selling at S$1.00 each. Today, they are worth S$2.40 apiece and are valued at around 27 times trailing earnings while carrying a historical dividend yield of around 3.1%.

Sarine Technologies

2009

2010

2011

2012

2013

Dividends Per Share (US cents)

0.64

1.6

2.6

4.5

6.0

Earnings Per Share (US cents)

0.47

3.3

5.2

6.1

7.0

Free Cash Flow Per Share (US cents)

2.6

3.8

4.6 5.6

3.6

Cash (in US$, millions)

12.1

22.9

14.4

19.2

20.0

Debt (in US$, millions)

0

0

0

0

0

*Free Cash Flow is defined as Cash Flow from Operations minus Purchase of Plant, Property & Equipment.

Source: S&P Capital IQ

For investors who would like a slice of the tourism-sector in China, Straco Corporation (SGX: S85) could fit the bill. The company’s main assets are its two aquariums in the country, one of which is the Shanghai Ocean Aquarium with the other being Underwater World Xiamen.

In the company’s latest earnings release for 2013, revenue and profits for the year grew by some 32% and 73%, respectively, to S$72.8 million and S$34.1 million. Much of the growth had been driven by growing visitor numbers to its aquatic attractions; in the fourth quarter of 2013, more than 590,000 visitors in total had visited both aquariums, up 17.1% from a year ago.

Considering that ‘only’ 465,000 visitors had been to Shanghai Ocean Aquarium and Underwater World Xiamen back in the fourth quarter of 2010, the popularity of Straco’s main attractions show no signs of waning.

Straco’s shares are selling for S$0.50 currently and carry a price-earnings ratio of 12. The aquarium operator also carries a dividend yield of 4%, which is somewhat higher than the Straits Times Index’s (SGX: ^STI) yield of around 2.8%.

Straco Corporation

2009

2010

2011

2012

2013

Dividends Per Share (Singapore cents)

0.50

0.75

0.75

1.25

2.00

Earnings Per Share (Singapore cents)

1.0

2.1

1.9

2.3

4.0

Free Cash Flow Per Share (Singapore cents)

1.6

3.0

2.3

3.1

4.1

Cash (in S$, millions)

45.1

65.1

82.2

96.0

108

Debt (in S$, millions)

0

0

0

0

0

*Free Cash Flow is defined as Cash Flow from Operations minus Purchase of Plant, Property & Equipment.

Source: S&P Capital IQ and Straco’s 2013 earnings release

Rounding up the trio’s glove manufacturer Riverstone Holdings (SGX: AP4). The company makes rubber (both of the latex and nitrile types) gloves for both cleanroom (i.e. electronics manufacturers) and healthcare uses.

Over the years, its manufacturing capacity has expanded greatly from some 601 million pieces of gloves at the end of 2005 to 3.1 billion gloves at the end of 2013. 60% of the company’s current capacity is catered for healthcare-related gloves and the remaining 40% are utilised for the production of cleanroom gloves.

Much of that growth has been fuelled by the company’s own resources as it has managed to keep a remarkably clean balance sheet while still enjoying above-average returns on equity over the years.

Going forward, the company has a new manufacturing site in Taiping, Malaysia, that’s slated to come online by the third quarter of 2014. Production capacity would likely undergo a huge increase given how the new plant’s covering some 30 acres of land area while Riverstone’s existing facilities are spread over only 22 acres.

Riverstone’s shares are exchanging hands at S$0.835 apop. At that price, those shares carry a historical dividend yield of 3.2% and are valued at around 13 times trailing earnings.

Riverstone Holdings

2009

2010

2011

2012

2013

Dividends Per Share (sen)

5.3

5.9

5.9

6.0

6.8

Earnings Per Share (sen)

9.5

13

12.2

12.2

16.0

Free Cash Flow Per Share (sen)

4.4

2.8

3.9

9.6

14.0

Cash (in RM, millions)

24.4

25.2

29.4

30.1

57.1

Debt (in RM, millions)

0.7

0.2

0

0

0

*Free Cash Flow is defined as Cash Flow from Operations minus Purchase of Plant, Property & Equipment.

Source: S&P Capital IQ

Foolish Bottom Line

To be certain, looking at these simple financial figures can never guarantee an investment’s profitability. In fact, there’s still work to be done on the investor’s part in determining if those company’s competitive advantages can still be intact five, 10, or even 20 years into the future; that’s information that cannot be gleaned from a study of a company’s financials alone.