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Is This Company A Great Dividend Share?

Vehicle and commercial inspection testing outfit VICOM Limited (SGX: V01) has a dividend yield which might attract income investors now. At its current price of S$6.07 and a dividend of S$0.225 per share in 2013, Vicom carries a historical yield of 3.71%. That’s a fair bit higher than the 2.6% yield of the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s share market barometer, the Straits Times Index (SGX: ^STI).

But, investing in Vicom for dividends based purely on its higher-than-average yield can be folly. To find great dividend shares, investors should instead place attention on factors such as the strength of a company’s finances and the presence or absence of any competitive advantages in its businesses.

In here, I’d be touching on three aspects of Vicom’s financials which can provide some clues on the company’s attractiveness as a strong dividend share. Let’s get started.

1. Dividend history

Year Dividend per share (Singapore cents)
2003 6.30
2004 5.75
2005 8.50
2006 11.9
2007 15.5
2008 9.25
2009 11.8
2010 16.1
2011 17.6
2012 18.2
2013 22.5

Source: S&P Capital IQ

A company’s dividend history can give us a good picture of its management’s willingness to reward shareholders. With a dividend that has grown by 260% from 6.3 Singapore cents in 2003 to 22.5 Singapore cents in 2013, Vicom’s management does seem committed in sharing the spoils with shareholders.

The company’s ability to produce an unmistakable upward trend in its dividends over the long-term might also excite income investors who are out looking for dividend growth shares.

2. Ability to generate free cash flow

Year Dividend per share
(Singapore cents)
Free cash flow per share (Singapore cents)
2003 6.30 10.7
2004 5.75 10.7
2005 8.50 10.7
2006 11.9 10.8
2007 15.5 17.3
2008 9.25 20.4
2009 11.8 21.6
2010 16.1 16.4
2011 17.6 18.2
2012 18.2 26.0
2013 22.5 28.6
Total 143 223

Source: S&P Capital IQ

A company which is able to generate free cash flow in excess of its dividends has some room for error in maintaining or even increasing those pay-outs even in leaner economic times.

In Vicom’s case, the company has been able to generate annual free cash flow which exceeds that of its dividend for most of the decade ended 2013

3. Balance sheet strength

Year Net cash position (S$ million)*
2003 1.96
2004 5.74
2005 9.59
2006 13.8
2007 14.3
2008 28.3
2009 42.5
2010 29.2
2011 55.2
2012 66.0
2013 78.5

*Net cash = total cash minus total borrowings

Source: S&P Capital IQ

Generally speaking, a company which has large amounts of borrowings may see its dividend being negatively affected in the future. That’s because creditors can exert a large influence on a company’s use of its cash through debt covenants and thus make the payment of dividends a low priority. In addition, high borrowings can also result in high interest payments. This saps a company’s cash flows and along with it, the ability to pay solid dividends.

Investors can rest easy with Vicom – the company’s balance sheet is in the pink of health as it has remained in a net cash position over the past decade. It is also notable that Vicom has had a growing net-cash position.

Foolish Bottom Line

Vicom has checked all the right boxes here. It has been paying consistent and growing dividends; it has generated lots of free cash flow; and it has a pristine balance sheet.

So, looking at its financials alone, Vicom is a company which might be of interest for investors looking for growing and steady dividends. But, like I mentioned earlier, that’s not a holistic view of the overall picture. To arrive at a better conclusion on Vicom’s investing merits, investors should still spend time digging through the qualitative aspects of the company’s businesses.

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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.