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Can Dividends At Singapore Airlines Fly Higher Soon?

Even though Singapore Airlines (SGX: C6L) main job involves flying both passengers and cargo around the world, its dividend yield is anything but high.

In its last completed financial year (for the 12 months ended 31 March 2013), the airline paid out a total of S$0.23 per share in dividends; based on its current share price of S$10.38, that translates into a trailing yield of just 2.2%. In comparison, the Straits Times Index (SGX: ^STI) has a yield of around 2.7% at its current level of 3,270 points.

But while the airline’s dividends are low at the moment, its pay-out has been cyclical as seen below. Given that the company would be releasing its full-year results soon on 8 May 2014, can investors look forward to a bigger annual dividend?

Financial year ended 31 March

Dividends per share

2007

S$1.00

2008

S$1.00

2009

S$0.40

2010

S$0.12

2011

S$1.40

2012

S$0.20

2013

S$0.23

Source: S&P Capital IQ

A good place to start looking for clues could be with how management thinks about the use of capital (of which the distribution of dividends is one such use) within the company. This is from SIA’s latest annual report for the financial year ended 31 March 2013 (FY 2013):

The primary objective of the management of the Company’s capital structure is to maintain an efficient mix of debt and equity in order to achieve a low cost of capital, while taking into account the desirability of retaining financial flexibility to pursue business opportunities and adequate access to liquidity to mitigate the effect of unforeseen events on cash flows…

… The Group monitors capital using a gearing ratio, which is total debt divided by total capital.”

From the above, we can see how management places an emphasis on maintaining a strong balance sheet to tide over rough times. And management’s idea of a strong balance sheet would have to depend on the gearing ratio. In its last two completed-financial years, the gearing ratio of the company has been at 0.08, which is a comfortable level for management. So, that could give us a basis from which to judge what might be considered as an imprudent gearing ratio.

While the gearing ratio would have to depend on a more detailed breakdown of the airline’s balance sheet (which is given in its annual reports, but not in its quarterly earnings announcements), it’s unlikely to see SIA’s management having any future concerns with its upcoming balance sheet; for the quarter ended 31 Dec 2013, the airline had S$4.91 billion in cash while having total debt plus long-term liabilities of only S$984 million.

As a result, this would leave the profitability of SIA as the main determinant of its level of dividends.

During SIA’s earnings release for the six months ended 30 Sep 2013 (the first half of FY 2014), it managed to post a 68% year-on-year jump in profits to S$282 million for that half-year period. Consequently, the airline’s interim dividend for the first half of FY 2014 had also increased by 67% from S$0.06 per share a year ago to S$0.10 per share.

But while that seems encouraging for investors who are looking for a bigger annual dividend from SIA, its last earnings release had some causes for concern. For the quarter ended 31 Dec 2013, the airline’s profits had been slashed by 65% year-on-year to S$50.1 million. The company also warned that “the outlook for the air transportation industry continues to be challenging with airlines offering aggressive fares amidst increasing capacity, and fuel prices remaining high by historical standards.” Those are signs that do not exactly bode well for the airline’s performance in the last quarter of FY2014.

Given such a backdrop – and despite the huge increase in the airline’s interim dividend – there are legitimate reasons to doubt the ability of SIA in growing its annual dividend this time around.

But as it is, nothing’s certain until the airline hands in its financial figures within the next few weeks.

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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 doesn’t own shares in any companies mentioned.