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Four Shares for Great Dividends

The late American tycoon John D. Rockefeller reportedly once said, “Do you know the one thing that gives me pleasure? It’s to see my dividends coming in.” And why not? After all, dividends are akin to a long-lived stream of passive income that flows to investors without the need for additional toil or labour bar the requisite need to perform due diligence before any investment’s made.

But what exactly constitutes this due diligence? For starters, it would mean a background check on the historical financials of a company. Here are some signs that investors should look out for in a company’s financials:

1) Dividend history: Ideally, one should be on the look-out for companies that have managed to consistently grow or at least maintain their dividends over long stretches of time.

2) A low pay-out ratio: Companies that pay-out only a small percentage of their earnings as dividends tend to be ones that are not overstretching themselves while sharing the spoils with shareholders.

3) Ability to generate free cash flow in excess of cash-dividends paid over time: Dividends are ultimately paid out from the cash that a company generates from its businesses and it’s generally not a healthy sign to see a company pay dividends that are almost always in excess of the free cash flow it generates.

4) A clean balance sheet: Companies that are not over-burdened with debt have much more leeway to manoeuvre their finances during tough economic climates and protect their pay-outs to shareholders.

Admittedly, it might be just a handful of companies that would exhibit such financials and great dividend-paying companies might even fall through the cracks when using such mechanical screens. Nonetheless, companies that possess strong financials as mentioned above are likely to be less risky.

So, are there any local companies that manage to pass through a screen made using the criteria above? Turns out, there are. Here are four companies that managed to filter through using their financials from 2007 as a starting point. A quick side note is in order before looking at the companies: 2007 was chosen as a starting point in particular because it would encompass the recession years of 2008-2009 and companies that manage to do well even during those rough times could be a sign of them possessing quality businesses.

1. Kingsmen Creatives (SGX: 5MZ)

This MICE (meetings, incentives, conventions, and exhibitions) industry player has a small market capitalisation of only S$182 million at its current share price of S$0.94. By helping design, manufacture, and set up installations for retail outlets of globally-recognised brands, theme parks, museums, and exhibitions, Kingsmen Creatives has managed to deliver some stellar financial figures over the past seven years.

Year

Dividends per share

Pay-out ratio

Free cash flow minus cash dividends paid*

Total cash minus total debt*

2007

S$0.02

38%

S$9.6

S$21.1

2008

S$0.03

40%

S$7.9

S$27.9

2009

S$0.035

44%

-S$5.7

S$15.5

2010

S$0.04

50%

S$7.5

S$16.3

2011

S$0.04

47%

S$2.9

S$19.3

2012

S$0.04

45%

S$20.6

S$31.8

2013

S$0.04

42%

S$10.6

S$42.5

*Figures are in S$, millions

Source: S&P Capital IQ

From the table above, we can see how Kingsmen Creatives has managed to boost its dividends slowly over time even though it’s been keeping its pay-out constant since 2010. Meanwhile, its pay-out ratio has never exceeded 50% and it has been able to generate free cash flow in excess of its cash dividends most of the time. To top it off, the company had been able to keep its balance sheet remarkably clean by being in a net-cash (total cash minus total debt) position since at least 2007.

At its current price, Kingsmen Creatives is valued at 10 times trailing earnings and carries a historical dividend yield of 4.3%.

2. Vicom (SGX: V01)

Vicom is the vehicle inspection and commercial testing arm of land-transport outfit ComfortDelGro Corporation. Besides running seven out of the nine vehicle inspection centres in Singapore, Vicom’s SETSCO arm also provides testing and inspection services for a wide variety of industries including aerospace, biotechnology, marine and offshore, and building construction, among others.

As a business, Vicom has displayed remarkably steady growth over the years and its financials also ticks all the right boxes, as seen below

Year

Dividends per share

Pay-out ratio

Free cash flow minus cash dividends paid*

Total cash minus total debt*

2007

S$0.155

97%

-S$0.9

S$14.0

2008

S$0.093

50%

S$13.8

S$27.7

2009

S$0.118

50%

S$13.0

S$42.4

2010

S$0.161

63%

S$5.8

S$49.1

2011

S$0.176

61%

S$3.6

S$55.0

2012

S$0.182

61%

S$10.0

S$66.0

2013

S$0.225

70%

S$12.0

S$78.5

*Figures are in S$, millions

Source: S&P Capital IQ

At its current share price of S$5.90, the company’s selling for 18 times its historical earnings and has a dividend yield of 3.8% based on its dividends for 2013.

3. ARA Asset Management (SGX: D1R)

The company’s a manager of physical properties, private real estate funds, and publicly-listed real estate investment trusts. Currently, the company has five private real estate funds and six REITs under its banner; for the latter group, that includes Singapore-listed REITs like Fortune REIT, Suntec REIT, and Cache Logistics Trust. All told, ARA’s managing some S$25.5 billion in assets now.

The company’s AUM (assets under management) has grown tremendously, from just S$600 million in 2003 to S$25.5 billion as mentioned. Being a company that gets compensated partly due to its AUM, the growth in assets has parlayed into some strong results as seen below.

Year

Dividends per share

Pay-out ratio

Free cash flow minus cash dividends paid*

Total cash minus total debt*

2007

S$0.0262

58%

-S$13.7

S$54.9

2008

S$0.0304

70%

S$17.2

S$22.8

2009

S$0.0331

58%

S$20.9

S$27.8

2010

S$0.0396

52%

S$24.4

S$23.5

2011

S$0.0455

56%

S$13.8

S$57.3

2012

S$0.0455

53%

S$42.4

S$95.5

2013

S$0.050

57%

S$4.9

S$8.9

*Figures are in S$, millions

Source: S&P Capital IQ

ARA Asset Management’s shares are exchanging hands at S$1.81 now. Being an asset manager, a more appropriate rule-of-thumb for its valuation measure could be its AUM-to-Price ratio. On that front, the company’s valued at 6.1% of its AUM and also offers a historical dividend yield of 2.8%.

4. Raffles Medical Group (SGX: R01)

The healthcare provider runs its flagship tertiary healthcare facility, the Raffles Hospital, in Singapore. In addition, it also has a network of 78 multidisciplinary clinics here as well as four other medical centres in Hong Kong and Shanghai.

Being in a defensive industry that’s generally known for being able to withstand recessions, Raffles Medical Group has combined that with able management to produce stellar growth over the past decade. The table below shows just a snapshot of its financials since 2007 along the lines of my quantitative-dividend screen.

Year

Dividends per share

Pay-out ratio

Free cash flow minus cash dividends paid*

Total cash minus total debt*

2007

S$0.025

34%

S$18.0

-S$5.5

2008

S$0.025

41%

S$21.0

S$17.9

2009

S$0.030

41%

S$30.4

S$49.9

2010

S$0.035

40%

S$28.1

S$84.6

2011

S$0.040

42%

S$49.5

S$28.2

2012

S$0.045

43%

S$50.7

S$82.7

2013

S$0.050

32%

S$53.2

S$261

*Figures are in S$, millions

Source: S&P Capital IQ

Raffles Medical Group is selling for S$3.31 apiece and valued at 21 times trailing earnings while carrying a dividend yield of 1.5%.

Foolish Bottom Line

The four shares above have greatly outperformed the market since the start of 2008, in large part due to the strength of their corporate results. Even as the Straits Times Index (SGX: ^STI) has dropped from 3,482 points to its current level of 3,203 points, Kingsmen Creatives, Vicom, Raffles Medical Group, and ARA Asset Management has jumped by 96%, 224%, 119%, and 165% respectively.

While parsing through a company’s financials for signs of great historical performance can never be a guarantee of their future returns, one thing’s for sure: The business results of the four aforementioned companies have been things of beauty.

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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 Kingsmen Creatives and Raffles Medical Group.