3 Things You Must Know About the Dividends of Singapore Exchange Limited

dividends bag of cash money

According to current data from the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s share market barometer the Straits Times Index (SGX: ^STI) – investors are able to get a distribution yield of close to 4% from the ETF now.

In other words, Singapore’s share market is giving out an average dividend yield of close to 4% currently. With that in mind, the dividend yield offered by Singapore Exchange Limited (SGX: S68) might not be very attractive for income investors – based on the stock exchange operator’s current price of S$7.20 per share and its dividend of S$0.28 per share for the financial year ended 31 June 2014 (FY2014), Singapore Exchange carries a historical yield of 3.9%.

But, it’s not a particularly safe way to invest if an income investor rejects a share just because it has a yield that’s lower than average. Instead, more thought has to go into the safety of the share’s dividend and the company’s ability to grow its dividend over time. Here are three things which can help investors answer these questions on Singapore Exchange’s dividend.

1. Dividend history

Financial year ended 30 June Dividend per share (Singapore cents)
2004 10.8
2005 23.5
2006 16.2
2007 36.0
2008 38.0
2009 26.0
2010 27.0
2011 27.0
2012 27.0
2013 28.0
2014 28.0

Source: S&P Capital IQ

Singapore Exchange has been very consistent in terms of paying a dividend. But, the firm has had some issues with increasing its pay-out. This might not impress investors who are out looking for growing dividends.

2. Ability to generate free cash flow

Financial year ended 30 June Dividend per share (Singapore cents) Free cash flow per share (Singapore cents)
2004 10.8 17.0
2005 23.5 8.20
2006 16.2 20.0
2007 36.0 32.2
2008 38.0 43.4
2009 26.0 22.9
2010 27.0 30.9
2011 27.0 27.5
2012 27.0 27.6
2013 28.0 36.6
2014 28.0 26.8
Sum S$2.875 S$2.931

Source: S&P Capital IQ

Dividends are ultimately paid out by a company from the cash it has on hand. That cash can come from the company raising capital from investors, taking on debt, or earning it through its daily business operations. Although there can be exceptions, the most sustainable form of getting cash would be for a company to earn it from its business.

In light of that, businesses which generate free cash flow in excess of its dividends have a natural buffer to protect against lean times. Singapore Exchange has aced this measure, but it should also be noted that it has had trouble growing its free cash flow since the metric peaked in FY2008 – that’s very likely why the company’s dividend had not been able to grow consistently as well.

3. Balance sheet strength

Financial year ended 30 June Net cash (S$, million)*
2004 460
2005 120
2006 400
2007 753
2008 822
2009 645
2010 685
2011 693
2012 697
2013 763
2014 756

*Net cash = total cash minus total borrowings

Source: S&P Capital IQ

Generally speaking, a company which is heavily leveraged might find the handling of its own cash flows being restricted by lenders in the future – and lenders do have that ability through debt covenants. In addition, a company with a weak balance sheet might see its cash flows channelled toward the payment of interest expenses and debt repayments instead of dividends.

With Singapore Exchange, investors can rest easy on this front – the stock exchange operator has a rock solid balance sheet that’s flush with cash. In fact, over the past decade, the company has not borrowed a single cent.

Foolish Bottom Line

Singapore Exchange does not seem to be a company whose dividend is in any sort of trouble given its track record, ability to generate free cash flow, and the strength of its balance sheet. But that said, there are still other important qualitative aspects of Singapore Exchange’s business to consider before a more complete picture of its dividend can emerge.

For instance, the attractiveness of Singapore in relation to say Hong Kong or China as a destination for companies to list themselves in Asia is an important part of Singapore Exchange’s future. The change in the amount of trading that goes on in Singapore’s derivatives and equities market also has a huge bearing on Singapore Exchange’s profitability. These are just some of the other factors which investors have to consider too.

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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.