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3 Things You Must Know About the Dividends of ComfortDelGro Corporation Limited

Credit: Simon Cunningham

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

For investors looking out for attractive income shares, land-transport outfit ComfortDelGro Corporation Limited (SGX: C52) would likely not be a share which would catch much attention. With its current share price of S$2.54 and a dividend of S$0.07 per share in 2013, the company has a trailing dividend yield of 2.76%. That is barely higher than the market average.

But, it can be folly for income investors to dismiss ComfortDelGro purely on the grounds of it having a low dividend yield. To find great long-term dividends, investors should instead place attention on factors such as the competitive advantages of a company’s businesses and the strength of its finances, amongst others.

In here, I’d be touching upon three aspects of ComfortDelGro’s financial picture which can give us clues on its attractiveness as a strong dividend share. So, let’s go!

1. Dividend history

Year

Dividend per share (Singapore cents)

2003

4.21

2004

9.61

2005

10.0

2006

8.90

2007

9.10

2008

5.00

2009

5.30

2010

5.50

2011

6.00

2012

6.40

2013

7.00

Source: S&P Capital IQ

Looking at a share’s dividend history can give us a sense of management’s commitment in rewarding shareholders through dividends. In the case of ComfortDelGro, it’s easy to see that they’ve been paying out dividends consistently for at least a decade – that’s a good sign.

That said, it should still be pointed out that ComfortDelGro’s rather patchy track record of growing its dividend might be off-putting for investors who are more attuned toward finding dividend-growth shares.

2. Ability to generate free cash flow

Year

Dividend per share
(Singapore cents)

Free cash flow per share (Singapore cents)

2003

4.21

10.6

2004

9.61

12.5

2005

10.0

5.51

2006

8.90

7.81

2007

9.10

15.1

2008

5.00

10.7

2009

5.30

13.5

2010

5.50

4.87

2011

6.00

10.4

2012

6.40

8.00

2013

7.00

9.34

Total

77.0

108

Source: S&P Capital IQ

Dividends are ultimately paid out through the cash that a company generates from its daily business operations. So, a company which has historically been able to generate free cash flow in excess of its dividends paid gives itself some room for error in maintaining or even increasing those pay-outs during leaner economic conditions.

ComfortDelGro scores well on this front given that it has pretty much generated more-than-sufficient free cash flow over the years to fund its dividend.

3. Balance sheet strength

Year

Net cash (S$, millions)*

2003

357

2004

254

2005

86

2006

128

2007

150

2008

229

2009

152

2010

126

2011

216

2012

220

2013

194

*Net cash = Total cash minus total borrowings

Source: S&P Capital IQ

A balance sheet is like a window from which investors can peer into the financial health of a company. If a company’s finances are in bad shape, it naturally follows that its dividends would be in danger. On the other hand, if a company has a really strong balance sheet, it’s likely that its dividends would have a nice buffer against unexpected negative business developments. That’s why it pays for a dividend investor to look at a company’s balance sheet.

In the case of ComfortDelGro, it does have a solid balance sheet given that it has managed to achieve a consistent net cash position over the past decade.

Foolish Bottom Line

ComfortDelGro ticks all the right boxes: 1) It has a consistent history of paying dividends (though there’s room for improvement in terms of being able to grow its pay-out); 2) it produces ample free cash flow; and 3) it has maintained a strong balance sheet for a long time.

So in terms of its finances at least, ComfortDelGro might be attractive for investors looking for steady dividend pay-outs. But like I mentioned earlier, that’s not an entirely holistic picture. Investors should still spend time investigating ComfortDelGro’s qualitative business fundamentals before a more definitive conclusive about its investing merits can be reached.

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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.