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This Dividend Payer’s Share Price has Increased 138%: Can it Continue?

Dairy Farm International Holdings Ltd  (SGX:D01) has been a steady winner over the past five years. From 1 January 2009 to its closing price yesterday, it has made capital gains of around 138%. By comparison, the total returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was just 79.2% for the same duration.

For the past five plus years, the company has collectively paid out US$0.96 in dividends per share. The dividend has also steadily increased from US$0.15 per share in 2009 to US$0.23 per share in 2013.

Splendid, can I have more?

Although the returns from Dairy Farm have been refreshing, as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price could be.

Dairy Farm’s business is made up of three major divisions: Food; Health and Beauty; and Home Furnishings. The breakdown of the divisions were first shared in 2013 and is summarized below.

Dairy Farm revenue breakdown

Source: Company Earnings Report

The Food division includes convenience stores (primarily 7-Eleven) in Hong Kong, Macau, Singapore and southern China. On top of that, the division also consists of supermarkets and hypermarkets located in Southeast Asia, Hong Kong, and Taiwan. The supermarket brands are mainly Wellcome and Cold Storage, while the hypermarket stores generally fall under the Giant brand. When put together, the collection of convenience stores, supermarkets, and hypermarkets represent a significant 75% of the company’s revenue in 2013.

The Mannings and Guardian network of stores make up Dairy Farm’s Health and Beauty business division. This network of stores, which takes up around 21% of the company’s total sales, operates in countries and regions such as Singapore, Mainland China, Hong Kong, and Macau. Lastly, the Home Furnishings division makes up only 4% of total revenue. The popular Swedish furniture store brand IKEA in Hong Kong, Indonesia, and Taiwan make up the bulk of revenue in this division.

Beyond revenue, we would ideally like to see profit rise together with sales. For that, we look into the profitability of the business divisions.

Dairy Farm profit breakdown

Source: Company Earnings Report

Interestingly, it is the health and beauty division which contributes the most to Dairy Farm’s operating profit. This is seen when this segment contributed 21% to total revenue but makes up 35% of the company’s total operating profit. Additionally, while Home Furnishings provides the least amount of revenue, the segment actually has the highest operating profit margin at 10.3% in 2013. Health and Beauty came in second with around 9% while the Food Division was a distant third with a little more than 4%.

Finally, Foolish investors would look for the accumulated profits to end up on the balance sheet in the end. To do this, we look at the development of cash and debt for the company.

Dairy Farm balance sheet

Source: Company Earnings Report

As it turns out, Dairy Farm is flush with cash on its balance sheet with very limited borrowings needed to fund its growth. The pan Asian retailer reported a cash position of US$656.1 million and modest borrowings of USD$70.9 million as of 30 June 2014.

Shopping for the future

I should also add that Dairy Farm has a 50% interest in Maxim’s catering, a leading restaurant chain in Hong Kong. It is worth pointing out that Maxim runs more than 130 Starbucks cafes in Hong Kong and Macau. In February 2013, Maxim was also granted the license agreement to operate the Starbucks brand in Vietnam. The Cheesecake Factory may also make a debut in Asia through the restaurateur.

Beyond this, for the Food division, Dairy Farm also increased its stake in Rustan Supercenters Inc. in Philippines to 66%. The division though, is struggling from higher costs in Singapore and weaker consumer sentiment in Malaysia.

Lastly, the IKEA in Tai Chung has reportedly received a strong reception in its first year of operations and another IKEA is expected to start its business in Indonesia in the fourth quarter of 2014.

Foolish bottom line

As lifelong students of Foolish long-term investing, it pays to look under the hood to understand whether a rise in a company’s share price is supported by the quality of business growth that we are looking for.

Foolish investors might want to keep an eye on the growth of the Healthcare and Beauty division which may provide an increasing share of profits for Dairy Farm. However, the Food division remains important by virtue of its sheer size within the company.

Dairy Farm trades at a price-to-earnings ratio of 27 and has a dividend yield of 2.3% based on yesterday’s close.

Read the second part of the analysis of Diary Farm here.

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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 contributor Chin Hui Leong owns shares in Starbucks.