Ever dreamed of receiving a salary raise in every year? Even if you might not get that in your normal day-job, it might be possible to achieve a growing income through carefully selected dividend shares. How can we make that careful selection though? Glad you asked. Here’re three things to look at which can help: (1) a company’s ability to generate free cash flow in excess of its dividends paid; (2) the strength of the company’s balance sheet; and (3) room for growth in the company’s business. The first two financial factors are important because they give us an idea…
Ever dreamed of receiving a salary raise in every year? Even if you might not get that in your normal day-job, it might be possible to achieve a growing income through carefully selected dividend shares.
How can we make that careful selection though? Glad you asked. Here’re three things to look at which can help: (1) a company’s ability to generate free cash flow in excess of its dividends paid; (2) the strength of the company’s balance sheet; and (3) room for growth in the company’s business.
The first two financial factors are important because they give us an idea of how much room for error a company has to maintain or grow its dividend even during lean economic conditions. The last point, meanwhile, gives investors comfort that a company may continue growing and thus dish out higher dividends over time.
Source: S&P Capital IQ
From the chart above, it’s easy to see how Vicom’s free cash flow and dividends (both per share figures) had both shown an unmistakable upward trend in the decade ended 2013. It’s also worth pointing out that the company has been generating free cash flow that’s in excess of its dividends paid.
In addition, the chart also makes it clear that Vicom’s balance sheet has been really strong over the years (the company has been operating with zero debt since 2005) and has even strengthened steadily.
Coming to its prospects for growth, it would be useful to first have a brief introduction of what the company does. Vicom has two main lines of business: The first involves vehicle inspection and testing services; the second sees the company provide testing, calibration, inspection, certification, consultancy, and training services to a wide range of industries including oil & gas, aerospace, marine, food, electronics, and construction, amongst others.
Under its vehicle inspection and testing business, Vicom runs seven out of the nine vehicle inspection centres in Singapore. According to analysts, the company has not raised prices for its inspection services – which are mandatory for vehicles in Singapore with the frequency of the inspections depending on the age, use, and type of vehicle – since 2006. Thus, raising prices is a possible avenue of future growth for the company.
As for Vicom’s other line of business, which is provided by its SETSCO subsidiary, management seems confident about its prospects. In Vicom’s latest second quarter results, management issued a brief statement:
“The non-vehicle testing business [referring to SETSCO] is expected to grow despite the keen competition.”
Speaking of keen competition, SETSCO is still a tiny player in its space. It was acquired by Vicom back in 2003 for S$15.7 million and in that year, it earned annual revenue of just S$22.8 million. But despite SETSCO being a small player in its industry (larger companies in SETSCO’s space include SGS SA and Bureau Veritas – the duo, which does business globally, clocked annual revenues of around S$3.37 billion and S$2.75 billion respectively in 2003), Vicom’s management has managed to more than double SETSCO’s top-line to S$51.4 million in 2010. SETSCO’s profitability grew even faster as operating profit shot up from S$1.5 million in 2003 to S$9.8 million in 2010.
Vicom stopped reporting segmental results after 2010, but given the company’s overall growth since that year, it seems fair to assume that SETSCO has not stopped growing.
Foolish Bottom Line
Vicom has a history of stellar financials and does seem to have room for growth. But, there are still risks investors should consider.
For instance, the company warned about challenges in its vehicle testing business in its second quarter results, saying that the business “is expected to moderate as more vehicles are expected to be deregistered in the year.” Even though Vicom may have untapped pricing power, it remains to be seen if the loss of registered vehicles can be more than made up for by an increase in prices for the company’s testing services.
Investors should also think about other issues related to the company. What’s the track record of its management team like when it comes to integrity-related issues? Does the company have a deep bench of managerial talent? Do management’s interests align with that of shareholders? Could any of their growth plans be derailed through changes in regulations? These are just some of the questions investors should answer before they can determine if Vicom would make for a great investment with the potential for growing dividends.
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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.