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One Strong Dividend Share

Dividends can be an important source of income for investors. But, a company’s dividend is hardly a guaranteed pay-out – there are many factors that can derail a company’s dividend. Some are more general in nature and include economic recessions. Then, there are some that are more company-specific in nature, such as poor performance that stems from incompetent management.

Either way, seeing dividends get slashed would likely not be something that anyone would want to see as an investor. What then, should investors look out for in their quest to find reliable dividends that could grow over time as well?

For a start, there are some key financial figures that investors can look at in a company. These include the company’s track record in paying dividends, its ability to generate free cash flow, and the strength of its balance sheet. Companies that score well on those three fronts tend to be less-risky dividend plays for investors.

Without further ado, here’s one such share: ARA Asset Management (SGX: D1R). The company has a rather unique business model amongst the 700-plus publicly-listed companies in Singapore’s stock market. Its main source of revenue lies in the fees that it earns from the management of funds. Specifically, it manages two types of funds: 1) private funds that invest in real estate and related-assets; and 2) publicly-listed real estate investment trusts. Some of the REITs under its management include Suntec REIT (SGX: T82U), Fortune REIT (SGX: F25U), and Cache Logistics Trust (SGX: K2LU).

A history of growing dividends

Year

Dividend per share (Singapore cents)

2007

2.62

2008

3.04

2009

3.31
2010

3.96

2011

4.55

2012

4.55

2013

5.00

Source: S&P Capital IQ

From the figures above, it’s easy to tell that ARA Asset Management has displayed a strong historical ability to either grow or maintain its dividends since 2007 (it was listed in Nov 2007).

An ability to generate strong free cash flow

Year

Free cash flow per share
(Singapore cents)

2007

1.36

2008

6.14

2009

5.60
2010

6.51

2011

5.79

2012

9.56

2013

5.58

Source: S&P Capital IQ

Since the company’s main bread-and-butter is the provision of management services for funds, its main assets are in the relevant-skills of its people. Thus, there’s no real need for the company to constantly invest capital in its own business to acquire manufacturing plants or hard assets etc. This allows ARA to generate plenty of free cash flow in its daily business operations and that’s reflected in the table directly above.

It’s also easy to tell from it that the company has been able to generate annual free cash flow that’s largely in excess of its dividends. This gives ARA plenty of wriggle-room to maintain its dividend even in rough economic climates and that’s a positive for investors.

A clean balance sheet through the years

Year

Total cash on balance sheet (S$, millions) Total debt on balance sheet (S$, millions)

2007

74 20

2008

42 19

2009

46 18
2010 42

19

2011 57

0

2012 100

5

2013 39

30

Source: S&P Capital IQ

Strong balance sheets with little debt, much like an excess of free cash flow over dividends, gives investors in a company a buffer against unforeseen harmful developments.

The capital-light nature of ARA’s business has allowed it to operate with minimal or no debt over the past seven years. In fact, the company has so far not had a year where debt exceeded its cash on the balance sheet. And, that’s not even counting other liquid securities that the company has on its balance sheet from time to time. If those securities were factored in, it would have made ARA’s balance sheet look even stronger.

Foolish Bottom Line

In terms of the financial characteristics needed for strong and reliable dividends, ARA Asset Management scores highly. But, it’s important to also point out that we’ve yet to dig into why the company has managed to perform as well as it did over the past seven years. Because of that, one can’t say for sure if the company’s historical track record is an accurate reflection of its future trajectory.

As impressive as ARA Asset Management’s backward-looking financials have been, more needs to be done before a definitive conclusion regarding its suitability as an investment can be reached.

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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.