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3 Things You Must Know About the Dividends of SembCorp Industries Limited

As of 8 August 2014, Singapore’s blue chips – i.e. the 30 shares that make up the Straits Times Index (SGX: ^STI) – offers a collective yield of 4.0% based on data from the SPDR STI ETF (SGX: ES3), an exchange-traded fund that tracks the index.

In light of that, a blue chip like SembCorp Industries Limited (SGX: U96), with its historical dividend yield of 3.2% (based on its current share price of S$5.31 and its dividend of S$0.17 per share in 2013), might not be that attractive for income investors.

The company is involved with utilities (think power plants and water treatment facilities), marine engineering (think ship repairs and the building of oil rigs etc.), and urban development (the development, marketing, and management of industrial parks as well as business, commercial, and residential space). SembCorp Industries’ marine engineering activities fall under the purview of its listed subsidiary Sembcorp Marine Ltd (SGX: S51), which is itself a component of the Straits Times Index.

In any case, it can be a mistake for income investors to dismiss a dividend paying share on account of the level of its dividend yield alone. Instead, it’s more important to focus on the safety of a company’s dividend and its ability to grow those pay-outs in the future. Here are three things investors must know about SembCorp Industries’ dividend that can help provide some clues on those aspects.

1. Dividend history

Year Dividend per share (Singapore cents)
2003 7.00
2004 11.3
2005 16.9
2006 43.0
2007 15.0
2008 11.0
2009 15.0
2010 17.0
2011 17.0
2012 15.0
2013 17.0

Source: S&P Capital IQ

It’s easy to see how SembCorp Industries has been paying out dividends consistently over the past decade, so that could give investors some confidence in the company’s ability to generate a profit and its commitment in sharing the spoils with shareholders.

But that said, given that SembCorp Industries’ dividend in 2013 remained essentially unchanged from where it was in 2007, it would likely not be a share that would excite income investors who are looking for growing dividends.

2. Ability to generate free cash flow

Year Dividend per share (Singapore cents) Free cash flow per share (Singapore cents)
2003 7.00 10.5
2004 11.3 14.7
2005 16.9 27.0
2006 43.0 -31.3
2007 15.0 8.83
2008 11.0 108
2009 15.0 29.8
2010 17.0 60.1
2011 17.0 -4.29
2012 15.0 -28.0
2013 17.0 15.8

Source: S&P Capita IQ

The ability to generate free cash flow in excess of dividends paid is important as it gives a company’s dividend a buffer during lean times. On this front, SembCorp Industries hasn’t been able to tick the right boxes given that it has been inconsistent in its ability to generate positive free cash flow.

3. Balance sheet strength

Year Net cash (S$, million)*
2003 -1309
2004 326
2005 187
2006 -125
2007 -19
2008 1607
2009 1649
2010 1718
2011 970
2012 -521
2013 362
*Net cash = total cash minus total debt

Source: S&P Capital IQ

High debt levels raise the possibility of a company’s dividend being negatively impacted in the future. That’s because debtors can place limitations on a company’s handling of its cash flows; in addition, high level of borrowings bring with it higher interest expenses and that can be a drain on a company’s cash flows too. The latter situation is more prominent now given that we’re in a low interest rate environment and the burden of interest expenses on a company’s finances can become very heavy if interest rates start creeping upward.

In any case, though SembCorp Industries has largely been able to maintain a strong balance sheet with more cash than debt, it’s also good to point out that its net cash level has fallen by quite a fair bit since its high of S$1.718 billion in 2010. That could be something for investors to keep an eye on.

Foolish Bottom Line

It seems that SembCorp Industries has done pretty OK in terms of paying out a consistent dividend and maintaining a strong balance sheet. But, though a study of the company’s historical financials is useful, it still gives only an incomplete picture with the company’s dividend. A broader look at the qualitative aspects of SembCorp Industries’ businesses would still be required.

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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.