Would Sarine Technologies’ 838% Growth in Dividends Continue?

Sarine Technologies (SGX: U77) is a supplier of technological products and software that helps in the planning, measurement, and production of diamonds. While that might sound like a nondescript business, the company has actually been one of the best performing shares in Singapore’s share market over the past five years since the Straits Times Index (SGX: ^STI) bottomed out on 9 March 2009 during the Great Financial Crisis that started seven years ago.

Even though the index itself had strong gains of 120% from 1,457 points back then to 3,210 today, Sarine Technologies has enjoyed a way more impressive return of 2,683% from S$0.092 a share to S$2.56.

Of course, one can point to the company’s collapse in share price during the crisis itself – Sarine Technologies was worth S$0.448 per share at the start of 2007, for instance – as one of the main reasons why it could achieve such a return. But, credit must be given where credit’s due and the company’s corporate performance also had a large role to play in its share price performance: In 2009, earnings per share at the firm came in at 0.47 US cents and that had spiked by 1,381% to 6.96 US cents in 2013.

Along the way, dividends at the firm would likely have caught the eye of income investors with a preference for growing dividends as it too grew tremendously from 0.64 US cents in 2009 to 6.0 cents in 2013. In fact, over its past four completed financial years, dividends at Sarine Technologies had gone through consecutive annual increases.

Year Dividends per share (US cents)
2009 0.64
2010 1.60
2011 2.60
2012 4.50
2013 6.00
Total change in dividend from 2013 to 2009 838%

Source: S&P Capital IQ

While dividends at Sarine Technologies did crater from 1.28 US cents in 2007 to 0.64 US cents in 2009, the strong subsequent resurgence in the company’s dividend might lead to a natural question: Can such growth continue?

From 2009 onwards, pay-out ratios – the percentage of earnings paid out as dividends – have been high at the company, peaking at 137% in 2009 as seen from the table below. This suggests that the company does not have much breathing room in terms of maintaining or increasing its dividend should its profits decline or at least stop growing.

Year Dividend per share* Earnings per share* Pay-out ratio
2009 0.64 0.47 137%
2010 1.60 3.35 48%
2011 2.60 5.17 50%
2012 4.50 6.15 73%
2013 6.00 6.96 86%
*Amounts in US cents

Source: S&P Capital IQ

On the other hand, Sarine Technologies’ cash-flow and balance sheet paints a better picture. From 2009 to 2013, the company’s free cash flow has, for the most part, been more than adequate to meet those dividend payments.

Year Cash dividends paid Free cash flow
2009 US$8.4 million
2010 US$5.4 million US$12.7 million
2011 US$8.1 million US$15.6 million
2012 US$13.7 million US$19.0 million
2013 US$18.1 million US$12.3 million

Source: S&P Capital IQ

Meanwhile, the company has also been able to grow its business without the use of much leverage. In fact, it has been operating without debt for a good number of years as seen in the table below. This suggests that Sarine Technologies has not been relying on borrowed capital to fund its dividends, which is a good sign.

Year Total cash on balance sheet Total debt on balance sheet
2009 US$20.9 million
2010 US$28.3 million
2011 US$33.5 million
2012 US$36.3 million
2013 US$33.0 million

Source: S&P Capital IQ

All told, Sarine Technologies’ financials depict a company that has a rock-solid balance sheet and the historical ability to generate more than enough cash to not only grow the business, but to fund dividends to shareholders as well as strengthen the balance sheet. So while it’ll be ideal if the company’s pay-out ratio is a tad lower than what it actually is right now, it does not appear that dividends at Sarine Technologies are in any immediate threat –  assuming of course, that the company can continue growing its business even if at a slower pace than before.

It should also be noted that it might be prudent for investors to not expect such blockbuster growth in its dividends going forward given how Sarine Technologies’ financials actually started 2009 at a very low base after its sales and profits tumbled very badly during the financial crisis of 2007-2009 as its business suffered.

In any case, Sarine Technologies has a current dividend policy of paying out at least 2 US cents every six months, which could perhaps be taken as a signal of management’s confidence in the strength of the company’s business. At the same time however, there might be legitimate concerns that the company is in an extremely cyclical industry – given its performance during the financial crisis as mentioned earlier – and that the advent of the next downturn might again affect its business and by extension, its dividends.

On that front, the company had started to change its business model in 2009 by introducing products where customers get charged on a per-use basis in a bid to generate recurrent revenue; previously, the company earned its keep mainly from one-time sales of its products. Since then, recurring revenue has grown to 30% of its overall revenue and that could theoretically, provide some cushion in the next downturn. But, whether that would work in practice is anybody’s guess and would be up to each individual to decide.

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 owns shares in Sarine Technologies.