3 Things You Must Know About Singapore Airlines’ Dividend

For investors who like high-yielding blue chips, Singapore’s national carrier Singapore Airlines Ltd. (SGX: C6L) could be a name that pops up now. With its dividend of S$0.46 per share for the financial year ended 31 March 2014 (FY2014) and its current share price of S$10.01, the airline carries a historical dividend yield of 4.6%.

This compares favourably against the yield of 2.6% for the SPDR STI ETF (SGX: ES3); the exchange-traded fund tracks Singapore’s share market barometer the Straits Times Index (SGX: ^STI).

But, it’s dangerous to think of Singapore Airlines as a good dividend share just because it has a yield that’s higher than the market benchmark. Instead, here are three other things investors need to note about Singapore Airlines’ dividend which can help them make a better decision.

1. Dividend history

Financial year ended 31 March Dividend per share (S$)
2004 0.25
2005 0.40
2006 0.45
2007 1.00
2008 1.00
2009 0.40
2010 0.12
2011 1.40
2012 0.20
2013 0.23
2014 0.46

Source: S&P Capital IQ

Although Singapore Airlines had been able to pay out a dividend consistently over the past decade, those dividends have seen huge fluctuations, which is very likely a reflection of the cyclical nature of the airline industry.

In any case, an investor who’s looking for growing dividends would likely not think highly of Singapore Airlines given its dividend history.

2. Ability to generate free cash flow

Financial year ended 31 March Dividend per share (S$) Free cash flow per share (S$)
2004 0.25 -0.41
2005 0.40 0.57
2006 0.45 0.21
2007 1.00 0.11
2008 1.00 1.74
2009 0.40 -0.31
2010 0.12 0.34
2011 1.40 1.73
2012 0.20 0.05
2013 0.23 -0.02
2014 0.46 -0.40
Sum S$5.91 S$3.606

Source: S&P Capital IQ

The important thing to note here is a company’s ability to generate free cash flow that’s in excess of its dividend. That’s because a company which is able to do so gives its dividend a larger room for error during leaner business or economic conditions.

We can tell that it’s not the case here with Singapore Airlines – it has paid out more dividends than it has earned in free cash flow over the years.

3. Balance sheet strength

Financial year ended 31 March Net cash (S$, billions)
2004 -0.610
2005 1.63
2006 2.35
2007 4.49
2008 4.50
2009 3.55
2010 3.73
2011 6.15
2012 4.53
2013 4.61
2014 4.37
*Net cash = Total cash minus total borrowings

Source: S&P Capital IQ

Having a strong balance sheet can help put investors at greater ease over a company’s dividend. Conversely, high debt levels increase the possibility of a company’s dividend being negatively affected in the future. That’s because lenders – through debt covenants – can have a strong say over how a company utilises its cash flows. In addition, large borrowings often translate into high interest payments, which suck up a company’s cash.

In here, Singapore Airlines ticks the right box, having at least S$1.6 billion in net cash since FY2005. But, a note of caution is also needed. The airline has off-balance sheet liabilities known as Operating Leases which amounted to S$3.69 billion as of 31 March 2014. These Operating Leases, which can be almost considered as a form of borrowings, are mainly for the planes which the airline leases. Payments on the leases are fixed according to pre-agreed terms and so, they represent a drag on the airlines’ future cash flows too.

Because of that, Singapore Airlines’ balance sheet, while still strong (as of 31 March 2014, the airline had S$680 million in cash net of all borrowings and operating leases), isn’t as robust as what the table above suggests.

Foolish Bottom Line

Although Singapore Airlines does have a strong balance sheet, there’s a lot of room for improvement in terms of its dividend history and ability to generate free cash flow.

That said, this still does not prove that the airline is a bad share for dividends (though admittedly, there are likely to be many other much better choices for dividends out there). A deeper dive into its business is still needed – after all, I had just shown how investors might have missed something important regarding Singapore Airlines’ financial strength if their analysis had not gone beyond the company’s balance sheet.

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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.