Is This Share with a 4% Dividend Yield a Great Income Share?

Infrastructure-related engineering outfit Boustead Singapore Limited (SGX: F9D) carries a juicy dividend yield at the moment which might attract income investors. At its current price of S$1.765, Boustead carries a yield of 4% based on its dividend of S$0.07 per share for the financial year ended 31 March 2014 (FY2014).

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

But, it can be a big mistake to invest in Boustead for dividends purely because it has a yield which is higher than the market average. To find shares with great dividends, investors should instead focus on factors such as the strength of the company’s finances and the presence or absence of any competitive advantages in its businesses.

In here, I’d be taking a closer look at three aspects of Boustead’s finances which can help give us clues on whether it can be a great income share. So, let’s get going.

1. Dividend history

Financial year ended 31 March Dividend per share (Singapore cents)
2004 0.75
2005 1.50
2006 1.00
2007 3.25
2008 5.00
2009 4.00
2010 5.50
2011 7.00
2012 5.00
2013 7.00
2014 7.00

Source: S&P Capital IQ

A company’s history of dividend payments can give investors some insight into management’s commitment to share the spoils with shareholders.

In the case of Boustead, it has been dishing out dividends consistently over the past decade. Although its dividend has not displayed clock-work like growth in each year, there’s still an unmistakable upward trend in its pay-outs over time. This might make the company attractive for investors looking for shares with growing dividends.

2. Ability to generate free cash flow

Financial year ended 31 March Dividend per share
(Singapore cents)
Free cash flow per share (Singapore cents)
2004 0.75 3.17
2005 1.50 -2.21
2006 1.00 8.56
2007 3.25 7.95
2008 5.00 14.4
2009 4.00 5.87
2010 5.50 9.53
2011 7.00 9.63
2012 5.00 16.2
2013 7.00 8.42
2014 7.00 19.3
Total S$0.47 S$1.01

Source: S&P Capital IQ

Dividends are paid with cash at the end of the day. That cash can from a company raising capital from investors, taking on debt, or earning it through its daily business activities. Although there can be exceptions, it’s generally more sustainable for a company to fund its dividends through the cash that’s generated from its business activities.

In light of that, companies which generate free cash flow in excess of their dividends paid give themselves some room for error during leaner business environments. As for the case of Boustead Singapore, it’s easy to see from the table above that it has aced this measure.

3. Balance sheet strength

Financial year ended 31 March 2014 Net cash position (S$ million)*
2004 14.3
2005 3.54
2006 83.8
2007 101
2008 153
2009 151
2010 201
2011 192
2012 179
2013 201
2014 184
*net cash  = total cash minus total borrowings

Source: S&P Capital IQ

Generally speaking, companies with weak balance sheets which are laden with debt run a higher risk of seeing their dividends being negatively affected in the future. That can happen for a number of reasons. For instance, creditors can exert some control over a company’s use of cash through debt covenants. Higher borrowings can also lead to higher interest payments, which saps a company’s cash flows and hence, its ability to pay dividends.

In the case of Boustead, investors can rest easy. The company has again aced this measure by being in a net cash position for at least a decade. In addition, it has also been able to steadily strengthen its balance sheet over time.

Foolish Bottom Line

Boustead has done well against all three measures. It has been paying consistent and growing dividends; it has had no problems generating free cash flow; and it has been a bastion of financial stability with its rock solid balance sheet.

So, judging from its finances alone, there’s a strong case to be made for Boustead’s attractiveness as a solid income share. But like I mentioned earlier, this isn’t a holistic picture regarding Boustead’s investing merits. To arrive at a more definitive conclusion, investors would still have to dig deep into the qualitative aspects of the company’s business.

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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.