Dividend-paying shares, when selected well, have the ability to deliver growing income over time. But, not every share which pays a dividend is a good dividend share. Here are three things which investors should look at which can help separate the wheat from the chaff: (1) a company’s historical 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 factors are important because they give us an idea of how much room for error a company has to…
Dividend-paying shares, when selected well, have the ability to deliver growing income over time. But, not every share which pays a dividend is a good dividend share.
Here are three things which investors should look at which can help separate the wheat from the chaff: (1) a company’s historical 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 factors are important because they give us an idea of how much room for error a company has to maintain or grow its dividend in tough economic or business climates. The last one gives us comfort that a company has space to grow and thus has a chance of being able to pay higher dividends in the future.
Infrastructure-related engineering outfit Boustead Singapore Limited (SGX: F9D) is one company which seems to have ticked the right boxes.
Source: S&P Capital IQ
As you can see from the chart above, Boustead’s dividends and free cash flow have climbed steadily upwards over its last 10 completed financial years with the latter being consistently higher than the former. It’s also worth pointing out that Boustead’s balance sheet has been really strong throughout that period and that the growth of its cash balance has significantly outpaced that of its borrowings.
These signs are all desirable financial traits when it comes to looking for shares with strong dividends.
Moving on to its prospects for growth, we can perhaps first start with the company’s business. Boustead categorises its business activities into four divisions, namely Industrial Real Estate Solutions, Energy-related Engineering, Geo-Spatial Technology, and Water & Wastewater Engineering. I have previously given in-depth detail about each segment here.
My colleague Chin Hui Leong had recently taken a close look at how each segment contributes to Boustead’s overall sales and profit growth. What Chin found was that the Industrial Real Estate Solutions division is the main driver for both Boustead’s top- and bottom-line. The segment is also where there are the most interesting prospects for future growth.
In August this year, Boustead inked a new deal with the Abu Dhabi Investment Council which would see both jointly set up the Boustead Development Partnership (BDP). The BDP would be developing/redeveloping modern logistics and high quality industrial facilities in Singapore and would also play the role of investor for certain design-build-and-lease projects, development projects, and redevelopment projects. According to the company, the potential investment pipeline is “over S$600 million.”
This could represent a source of future growth for Boustead as it looks to build up its property portfolio in preparation for a potential spin-off of its properties into a real estate investment trust. For some perspective, the company’s current stable of investment properties (as of 30 June 2014) stands at ‘only’ S$119.5 million.
Elsewhere, Boustead’s other moving cogs are also progressing well. The Geo-Spatial Technology division had been enjoying 11 consecutive years of top-line growth before its revenue dipped by 7% in the financial year ended 31 March 2014 (FY2014); the division has since shown signs of recovery as revenue had grown by 4% year-on-year in the first quarter of FY2015. Meanwhile, the Energy-related Engineering division had achieved a 9% year-on-year increase in quarterly revenue for the first quarter of FY2015; the growth had also come about after a large spike in revenue for the division for the whole of FY2014.
Foolish Bottom Line
Boustead has a history of solid financials and does seem to have some growth for growth in its business. But, there are still other factors investors need to consider.
For instance, has Boustead’s management displayed integrity and honesty in their business dealings and communication with investors? The company’s Chief Executive Officer Wong Fong Fui is already more than 70 years old – what’s the firm’s succession plan like? Does Boustead have a deep bench of managerial talent to take over from Wong? These are just some of the other issues investors have to ponder before they can determine if Boustead would make for a great dividend share.
To learn more about dividend investing and to keep up to date about the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead. Also, like us on Facebook to follow our latest hot articles.
The Motley Fool's purpose is to help the world invest, better.
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.