3 Things You Must Know About the Dividends of Singapore Technologies Engineering Ltd

Currently, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund that tracks Singapore’s share market barometer the Straits Times Index (SGX: ^STI) – carries a distribution yield of around 2.6%.

Within the Straits Times Index’s 30 constituents, there are 20 blue chips which carry a historical dividend yield higher than that of the STI ETF; a historical dividend yield is calculated by taking a share’s total dividends for its last-completed financial year and dividing it by its current share price.

One such blue chip is the aptly-named engineering outfit Singapore Technologies Engineering Ltd (SGX: S63). The company does engineering and defence-related work in four different sectors, namely Aerospace, Electronics, Land Systems, and Marine. Based on the company’s dividend for 2013 (Singapore Technologies Engineering has a financial year that coincides with the calendar year) and its current share price, it has a historical yield of 3.95%.

Looking at its yield alone, that might make the share seem attractive for income investors in relation to the market average. But, that’s not exactly a safe way to invest for dividends. Instead, here are three important things you must know about a share’s dividend before money’s plonked in: 1) Its history in paying out dividends; 2) its ability to generate free cash flow; and 3) the relative level of cash and debt on its balance sheet.

Of course, these are hardly the only three considerations investors must think about. But it’s a start. So, here goes.

1. Dividend history

Year Dividend per share (Singapore cents)
2003 11.30
2004 12.39
2005 13.60
2006 15.11
2007 16.88
2008 15.80
2009 13.28
2010 14.55
2011 15.55
2012 16.80
2013 15.00

Source: S&P Capital IQ

From the table immediately above, it’s easy to see how Singapore Technologies Engineering has been able to pay out a dividend consistently over the past decade with its pay-out never falling below S$0.113 per share.

But even though the company’s dividend has increased from S$0.113 per share in 2003 to S$0.15 per share in 2013, the growth in dividend hasn’t exactly been steady. For that reason, investors who are out looking for companies with growing dividends might opt to give Singapore Technologies Engineering a pass.

2. Ability to generate free cash flow

Year Dividend per share (Singapore cents) Free cash flow per share (Singapore cents)
2003 11.30 5.158
2004 12.39 3.133
2005 13.60 6.400
2006 15.11 8.961
2007 16.88 16.47
2008 15.80 10.69
2009 13.28 20.76
2010 14.55 16.09
2011 15.55 12.66
2012 16.80 26.13
2013 15.00 20.88

Source: S&P Capital IQ

The key thing to note here is a company’s ability to generate free cash flow that’s in excess of its dividend. Companies that are able to do so are in a better position to maintain or even grow its pay-out even in times of widespread economic distress.

With Singapore Technologies Engineering, its dividend was higher than its free cash flow in the earlier years. But since 2009, the situation has largely reversed and the company’s bringing in free cash flow that’s comfortably higher than its dividend.

3. Balance sheet strength

Year Net cash (S$, million)*
2003 918
2004 669
2005 276
2006 -12.2
2007 -50.9
2008 -41.7
2009 -255
2010 452
2011 411
2012 462
2013 719

*Net cash = Total cash minus total borrowings

Source: S&P Capital IQ

Companies that possess strong balance sheets would again provide some protection for its shareholders when it comes to paying out dividends when business is rough. In addition, it can also be a quick check on whether the company’s actually using borrowings to help pay dividends. Just to be sure, assuming debt to pay dividends is not exactly wrong or immoral; it’s just a relatively riskier way for a company to fund its pay-outs.

In the case of Singapore Technologies Engineering, its balance sheet weakened between 2006 and 2009 (its net cash position became negative), but has since regained its strength.

Foolish Bottom Line

The company doesn’t look too bad on all three fronts but like I said earlier, the study shouldn’t stop there.

A look back in history gives investors a framework to think about possible future outcomes for Singapore Technologies Engineering’s business fundamentals. But that also means that one must think about the competitive advantages its businesses may or may not possess; the level of integrity and business acumen the company’s leaders have; and the potential for growth that its businesses have in their respective markets. These are some of the other key considerations investors must think about before any investment can be made.

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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.