1 Tiny but Great Dividend Share

Dividends can be an important source of income for investors and it’s likely that no one would ever turn down a dividend. But, it must be noted that not every share which pays a dividend is a good investment.

Here are three things which investors can look out for to help separate the good from the bad: 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 factors are important because it gives 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 point gives investors comfort because a company with space to grow has a chance of dishing out higher dividends over time.

With these in mind, the tiny Kingsmen Creatives Ltd. (SGX: 5MZ) seems to have ticked the right boxes. Kingsmen Creatives, which has a market capitalisation of only S$180 million, is a communication design and production group and plays in the MICE (Meetings, Incentives, Conventions, and Exhibitions) industry space. The company helps its clients design, fabricate, and set-up installations for venues which include retail stores, offices, exhibitions, theme parks, museums, and more. Interestingly, an average of 70% of the company’s clients returns to it for its services.

kingsmen creatives financials

Source: S&P Capital IQ

As you can see from the chart above, Kingsmen Creatives has, for the most part, generated more free cash flow than the dividends it has paid. Both figures have also been steadily growing over the past decade ended 2013.

It’s worth pointing out too that Kingsmen Creatives’ balance sheet has not only remained really strong in those 10 years (it was always in a net-cash position), but that the balance sheet has been getting stronger as seen from the growing gap between the company’s cash and debt levels.

These are all very desirable traits from a financial standpoint when it comes to finding great dividend shares.

As for the company’s room for growth, there are two recent developments which might point to that. The first is this simple statement made by Benedict Soh, Executive Chairman of Kingsmen Creatives, in the company’s latest earnings release (emphasis mine):

“The pipeline of upcoming projects that will require our expertise and work over the next few years is substantial. Our unique business model and strong reputation for quality and delivery put us in good stead to capitalise on these opportunities for the sustainable growth of our business.”

The second development happened in the middle of last month, when Kingsmen Creatives bought a production facility in Malaysia for RM35 million. The company had previously been leasing the space but would now like to make it a permanent manufacturing hub for its clients in Europe and the USA. According to Soh, the purchase was made to help “meet increasing demand for [the company’s] products and services around the world.”

The statements and purchases made by Kingsmen Creatives give investors an insight into management’s confidence about the company’s business-future.

Foolish Bottom Line

Kingsmen Creatives has not only showcased great financials, but does seem to have room for growth as well. In addition, the company’s historical dividend yield (based on its current price and dividends for its last completed financial year) of 4.3% is a fair bit higher than the average yield in Singapore’s market; the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI), has a yield of around 2.7%.

But, there are still important risks for investors to consider. A pertinent one would be the issue of succession. The company’s co-founders and leaders, Soh and Simon Ong, are already in their early 60s. Does the company have a deep bench of managerial talent to take over from Soh and Ong?

All told, investors would have to weigh the risks and rewards in order to come up with a decision on whether Kingsmen would make for a great dividend share.

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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 owns shares in Kingsmen Creatives.