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Can Raffles Medical Group Continue Its Healthy Growth In Dividends?

At the Straits Times Index’s (SGX: ^STI) current level of 3,296 points, it’s fetching a dividend yield of around 2.7% if the SPDR Straits Times Index ETF’s (SGX: ES3) data is used as a close proxy.

In light of that, healthcare provider Raffles Medical Group’s (SGX: R01) trailing yield of only 1.4% – based on its current share price of S$3.62 and dividend of S$0.05 per share in 2013 – would not set any hearts racing amongst income investors.

But, a closer look at its dividend history would paint a slightly different picture:

Year

Dividends (Singapore cents)

2003

2.27

2004

2.27

2005

2.72

2006

3.63

2007

2.50
2008

2.50

2009

3.00

2010

3.50

2011

4.00

2012

4.50

2013

5.00

Source: S&P Capital IQ

Since 2003, the company’s dividend per share has more than doubled from 2.27 cents to 5.00 cents, representing an annualised growth rate of 8.2%. For income investors looking for dividend growth, Raffles Medical Group’s dividend history would have made it an attractive candidate.

That said, can the company actually continue growing its dividend healthily? Shares that have certain financial characteristics tend to make for less risky dividend plays. These characteristics are: 1) A track record of consistent and growing dividends; 2) a history of generating free cash flow that’s in excess of its dividend; and 3) a consistently clean balance sheet.

As I had shared previously, Raffles Medical Group has aced those historical measures. For the sake of convenience though, here’s all the other data again:

Year

Free cash flow per share
(Singapore cents)
Total cash on balance sheet
(S$, million)
Total debt on balance sheet
(S$, million)

2003

2.09 11.3 2.7

2004

3.24 32.2 2.1

2005

2.26 35.1 2.3

2006

3.87 41.9 2.0

2007

7.34 19.7 25.3

2008

6.56 44.5

26.6

2009 8.35 74.4

24.5

2010

8.36 107.1

22.6

2011

11.0 49.7

21.5

2012 11.1 102.5

19.7

2013 11.5 265.9

4.76

Trailing 12 months -21.2 98.3

5.2

Source: S&P Capital IQ

While the company has done well historically, going forward, there are also catalysts that might pave the way for even more growth. In the first quarter of 2014, the company had spent S$185 million on capital expenditures. The funds were mainly used for the purchases of two pieces of real estate – one located at North Bridge Road just beside the company’s current Raffles Hospital, the other near Holland Village in Singapore. Including the S$185 million spent to acquire the properties, Raffles Medical Group intends to spend S$430 million in total to develop the two sites.

The company’s flagship healthcare facility Raffles Hospital would see its gross floor area expand up to 49,217 square metres from 28,605 sqm currently when the construction’s completed at the North Bridge Road site. Management’s very confident of the developement and had commented that it “will offer significant scope for the hospital’s expansion and growth over the next 10 years.”

Meanwhile, the real estate located near Holland Village is meant for the development of a medical-retail centre that will house 9,000 square feet of floor space for medical and specialist services in addition to having even more floor space for banking, retail, and food & beverage outlets.

In addition, China has recently implemented healthcare reforms that make it easier for foreign companies to invest in joint-venture hospitals in the country. The company has had plans since last year to co-develop hospitals in the cities of Shanghai and Shenzhen and those healthcare changes would help grease the company’s plans going forward.

Although there are good things going for the company at the moment, there are also risks to be aware of. The company’s co-founder and chairman, Dr. Loo Choon Yong has made caring for patients and the provision of quality healthcare a cornerstone of Raffles Medical Group’s philosophy. That’s an asset. But, there’s no shortage of competition for Raffles Medical Group and any damage to its reputation for providing quality healthcare might put a significant dent to the company’s operations going forward.

Then, there’s also the issue of succession to be thinking of. Loo has been a great leader for Raffles Medical Group but, he’s in his mid-sixties and when he retires, a leadership change that isn’t handled well would negatively impact the company.

All told, investors would have to weigh both the positives and risks that Raffles Medical Group faces in order to get a better picture of its ability to continue growing both its business and dividends in the future.

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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 Raffles Medical Group.