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Can Super Group Sustain Its Growing Dividend?

As it stands, the Straits Times Index (SGX: ^STI) has a dividend yield of around 2.7% at its current level of 3,262 points. Given this backdrop, instant beverage maker Super Group’s (SGX: S10) trailing yield of 3.1% – based on its current share price of S$2.93 and annual dividend of S$0.09 per share for 2013 – does not seem too shabby at all.

In fact, the company’s dividends would be all the more attractive if investors were to look back at its dividend history over the past decade: Since 2003, dividends at Super Group have grown from 0.78 Singapore cents to 9 cents last year, as mentioned earlier.

Year

Dividends (Singapore cents)

2003

0.78

2004

1.20

2005

1.60

2006

1.60

2007

1.60

2008

1.60

2009

2.60

2010

5.40

2011

5.80

2012

7.10

2013

9.00

Source: S&P Capital IQ

So while Super Group has a great dividend history, can it actually sustain its growing dividend? I have previously described certain financial characteristics that companies ought to display if investors were on the lookout for shares that can deliver consistent and growing dividends over time. Let’s run Super Group through that filter.

Point 1: Does the company have a track record of consistent and growing dividends?

Without undue repetition, Super Group has aced this measure.

Point 2: Has the company been able to consistently generate adequate free cash flow that’s higher than its dividends?

Over the past decade, the company has had years whereby it’s not been able to produce free cash flow that’s higher than what it’s paying out as dividends. On first glance, that might seem like the company would be a poor dividend share. But, there are mitigating factors in Super Group’s favour.

Year

Dividends (Singapore cents)

Free cash flow per share (Singapore cents)

2003

0.78

3.60

2004

1.20

3.50

2005

1.60

0.52

2006

1.60

-2.70

2007

1.60

-1.16

2008

1.60

5.11

2009

2.60

11.1

2010

5.40

7.46

2011

5.80

-2.86

2012

7.10

4.06

2013

9.00

2.60

Trailing 12 months

5.03

Source: S&P Capital IQ

For instance, between 2011 and 2013, the company has been spending cash heavily to expand its production capacity for its Food Ingredients business segment where it manufactures beverage ingredients like non-dairy creamer and soluble coffee powder for sale to other beverage makers. In addition, capital has also been spent to build new production plants for new ingredients like botanical herbal extracts and liquid glucose syrup solids.

Such activities have caused a shortfall in free cash flow in recent times, but that’s capital that’s being spent with the view of growing the business. That’s distinct from an undesirable situation where a company’s paying out unsustainable dividends due to a chronic lack of free cash flow.

Point No.3: Does the company have a rock solid balance sheet?

Throughout the past decade, Super Group has been able to build up its cash hoard and operate largely with minimal or no debt. This is due to the company’s ability to earn more-than-adequate amounts of cash from its operations to not only sustain its current operations, but to grow the business, strengthen the balance sheet and pay out dividends.

Year

Cash and equivalents
(S$, millions)

Total debt
(S$, millions)

2003

35.4

27.8

2004

35.4

4.0

2005

19.5

4.1

2006

22.9

35.0

2007

21.6

7.2

2008

25.8

8.6

2009

41.9

4.0

2010

135

3.0

2011

83.3

1.7

2012

112

0.7

2013

98.5

0.0

Trailing 12 months

94.7

0.5

Source: S&P Capital IQ

Having a strong balance sheet would give Super Group plenty of buffer during tough times and also provide cash to make up for any temporary short-fall in cash flows to pay dividends. In fact, the company has been hoarding cash in years where free cash flow exceeds dividends and then using it to pay out dividends in years where free cash flow is inadequate.

Will Super Group be able to grow its dividends?

So, Super Group scores highly in the departments concerning its dividend history and strength of its balance sheet. In addition, while it hasn’t always been able to generate adequate free cash flow to cover its dividends, there are good business-based reasons for the recent short-fall and it might actually benefit shareholders over the long-term. All this seems to shine the company in a good light with regard to its ability to reward shareholders with growing dividends in the years ahead.

However, there are risks to consider. Super Group’s recent poor first quarter results would have casted some doubt on the company’s ability to continue its stellar dividend growth. In the quarter, sales had slipped by 6% to S$124.6 million compared to a year ago while its profits suffered even more with a 19% decline to S$18.6 million. The company had been facing troubles that include political unrest in one of its key markets in Thailand. Should the decline in its results continue, the company’s stellar financials might just deteriorate and those growing dividends could shrink.

But that said, Super Group’s rock solid financial characteristics do provide some respite for the company as it seeks to works through its current difficulties.

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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 Super Group.