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Can This Share With An 8.3% Dividend Yield Maintain Its Dividends?

The telecommunications equipment maker Nera Telecommunications (SGX: N01) is one juicy dividend share at its current price of S$0.725; with dividends of S$0.06 per share in 2013, that translates into a historical yield of some 8.3%. By way of comparison, the Straits Times Index (SGX: ^STI) has a yield of just 2.7% at its current level of 3,264 points.

But while Nera Telecommunications does have an attractive dividend yield currently, it can be a mistake to chase yields blindly. In light of that, can the company actually be able to maintain its dividend? I’ve previously discussed certain characteristics of companies that have a high chance of being able to deliver consistent and growing dividends. So, let’s see how Nera Telecommunications stacks up against those criteria.

Point No.1: Does the company have a track record of consistent and growing dividends?

Year

Total dividends (Singapore cents)

2003

2.875

2004

2.875

2005

5.245

2006

18.0

2007

4.0

2008

3.0

2009

3.0

2010

4.0

2011

2012

8.0

2013

6.0

Source: S&P Capital IQ; Company’s earnings releases

Even though dividends at Nera Telecommunications have fluctuated over the years, it has still grown from 2.875 cents in 2003 to 6.0 cents in 2013. In addition, despite the company seemingly having missed a pay-out in 2011, it had specifically channelled 4.0 cents worth of interim dividends in 2012 to ‘make up’ for the short-fall in 2011.

So in short, the company has done pretty well in this measure.

Point No.2: Has the company been able to consistently generate adequate free cash flow that’s higher than its dividends

Year

Total dividends
(Singapore cents)

Free cash flow per share (Singapore cents)

2003

2.875

5.59

2004

2.875

-1.97

2005

5.245 5.58

2006

18.0 -0.24

2007

4.0

2.63

2008

3.0

4.73

2009

3.0

5.51

2010

4.0

6.35

2011

7.21

2012 8.0

4.46

2013 6.0

6.66

Source: S&P Capital IQ; Company’s earnings releases

From the table immediately above, it can be seen that Nera Telecommunications has, for the most part, been able to earn sufficient free cash flow from its daily operations to cover its dividends.

But, there are also slight areas of concern here for investors. The company’s operating cash flow in 2003 came in at S$20 million. A decade later in 2013, operating cash flow had barely increased to S$24 million and highlights how growth in the company’s business has been anaemic at best. Even though dividends had more than doubled between 2003 and 2013, it should be noted that the gap between dividends and free cash flow in both years had shrunk by quite a wide margin.

If business at Nera Telecommunications can’t grow, there’s not much gas left in the tank for the company to step up those pay-outs despite its really strong balance sheet (see below).

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

For at least its past 10 completed financial years, Nera Telecommunications has carried zero debt on its balance sheet

Year

Total cash on hand
(S$, millions)
Total debt
(S$, millions)

2003

39.7 0

2004

28.9 0

2005

37.1 0

2006

25.8 0

2007

21.2 0
2008 18.8

0

2009 29.4

0

2010 40.0

0

2011

46.5

0

2012 43.7

0

2013 39.2

0

Source: S&P Capital IQ

With the company’s rock solid balance sheet, there’s plenty of buffer to tide over rough times. In addition, the balance sheet can provide extra cash for Nera Telecommunications to pay dividends in years where free cash flow falls short; it should be noted however, that siphoning cash from a strong balance sheet to pay dividends is really more of a ‘stop-gap’ measure rather than a sustainable means of maintaining those pay-outs.

Can Nera Telecommunications maintain its dividend?

So far, the company has displayed all the right signs. But, that isn’t nearly enough to say for sure how well the company might do going forward. Questions pertaining to the breadth and depth of the company’s competitive advantages within its industry (if any?) would have to be answered. Only when that’s done can we have a clear idea of Nera Telecommunications’ ability to maintain its dividends.

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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.