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Can This Steady Dividend Stalwart Scale New Heights?

Over the past five plus years, utility and marine stalwart SembCorp Industries Limited (SGX: U96) has been a steady source of dividends. Foolish dividend investors would be excited to know that the annual dividends have been increasing as well. Starting from 2009 (the company has a financial year which coincides with the calendar year), the dividend of S$0.11 per share had rose to S$0.17 by 2013.

For the first half of 2014, the company also announced a surprise interim dividend of S$0.05 per share. This was the first time an interim dividend was offered. Collectively, the company had paid out S$0.76 per share in dividends since 2009. For more information, My colleague Ser Jing has also looked into its dividend and cashflow track record.

But, that’s not all.

The capital gains for SembCorp Industries’ share price has been satisfying as well. From 1 January 2009 to its closing price last Friday, it has delivered capital gains of around 110%. By comparison, the total returns of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), was only around 80% for the same duration.

Can we have some more?

While the returns from SembCorp have been electrifying, as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price has been.

sembcorp industries revenue breakdown

Source: Company’s earnings report

SembCorp Industries’ business is primarily made out of its Utilities and Marine segments. For the Utilities segment, the company can act as a developer, owner, or operator of utility projects worldwide; these projects include both power plants and wastewater treatment and management plants. This segment made up about 47% of the company’s revenue in 2013, while the Marine segment took up slightly more at 51%.

The Marine segment’s contribution mainly comes from SembCorp Industries’ 60% ownership stake in SembCorp Marine Ltd (SGX: S51). SembCorp Marine  manufactures jack-up rigs and manages platform conversions.

Lastly, SembCorp Industries also has a Urban Development segment but the revenue from the segment is tiny in comparison to the other two.

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

sembcorp industries profit breakdown

Source: Company earnings report

The Utilities segment really shines on the net profit side. Its steady increase in profit contribution provided close to 55% of total net profit for the company by 2013. The Marine segment’s profitability, in comparison, has been a little more lacklustre in the last two years. The Urban Development side, given its small size, did well to contribute S$50 million in net profit for 2013.

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 over the years.

sembcorp industries balance sheet change

Source: Company’s earnings report

SembCorp Industries is currently net positive in cash. The stability of profits from its Utilities segment might give it some leeway for prudent use of debt. As of the end of 2013, the projected capex (capital expenditures) spend of S$1.16 billion for 2014 looks more than manageable, considering that the operating cash flow from the company was S$1.3 billion in 2013.

A quick peek ahead

SembCorp Marine reported a healthy order backlog of S$12.7 billion as of the second quarter of 2014. This backlog stretches out to 2019. The group received orders from Transocean for two proprietary drillship designs and these orders are deemed as a strong endorsement of SembCorp Marine’s capabilities. The segment will also see the completion of its new wholly-owned shipyard in Brazil by 2015. Initial operations will begin in the second half of 2014.

On the Utilities side of the business, the industrial stalwart may be looking towards wastewater projects treatment in China as well as major power plant projects in India.

Foolish takeaway

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 growth that we are looking for.

The steady growth in revenue and profits for the Utilities segment might be the key in providing resources for the company to support the growth in the Marine segment. The backlog for the Marine segment looks promising overall. So, both business segments might be where we want to keep our watchful Foolish eye on. We might want to keep the other eye on the company’s prudent use of debt too.

SembCorp Industries currently trades at a price-to-earnings ratio of 11 and has a dividend yield of 4.2%. Stay tuned in the weeks to come as we look into the geographical revenue spread the company.

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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 doesn’t own shares in any companies mentioned.