A company which can grow its dividends over the long-term can be a great income generator for investors. But, how can investors determine if a company can do just that? Here’re a few signs which can help separate the good from the bad: A company’s track record in growing its dividend. This is important as it gives investors insight on how committed management is in rewarding shareholders as a company grows. A company’s ability to grow its free cash flow and generate free cash flow in excess of dividends paid. Dividends are ultimately paid out through the cash that a…
A company which can grow its dividends over the long-term can be a great income generator for investors. But, how can investors determine if a company can do just that?
Here’re a few signs which can help separate the good from the bad:
- A company’s track record in growing its dividend. This is important as it gives investors insight on how committed management is in rewarding shareholders as a company grows.
- A company’s ability to grow its free cash flow and generate free cash flow in excess of dividends paid. Dividends are ultimately paid out through the cash that a company has. While a company can borrow or issue shares to raise the cash needed to pay dividends, it’s generally more sustainable for a company to pay a dividend through the cash that’s generated from its daily business operations. So, investors should keep an eye on the free cash flow metric as it measures that generated-cash after the necessary capital’s being spent to maintain the company’s business at its current state.
- The strength of the company’s balance sheet. Companies with weak balance sheets that are laden with debt generally run much higher risks of having to cut their dividends when their businesses slow down temporarily. In this sense, a strong balance sheet gives a company room for error and resources to tide over tough times.
With these criteria in mind, how would a share like instant beverage manufacturer Super Group Ltd. (SGX: S10) fare?
Source: S&P Capital IQ (data for 2014 is for the 12 months ended 30 September 2014).
As you can see in the chart above, Super Group has seen its dividends grow steadily in the decade ended 2013 and that’s a good thing. In contrast, its free cash flow has been a lot more erratic with the figure dipping into negative territory in some years – this might be a negative point against the company for some investors. But, it should also be noted that the company’s drop in free cash flow from 2011 to 2013 had been due to capital spending to drive growth (for instance, in 2011, the company had spent a total of S$53.2 million to improve existing production facilities and build new ones) and that might turn out to be a great thing for investors.
Moving on, investors might be heartened to see that the firm has, for the most part since 2003, had a rock-solid balance sheet which carried more cash than debt.
A Fool’s take
A quick glance at Super Group’s finances actually points to the company having a pretty strong case to be an attractive income share. There’s another plus point for the company. At Super Group’s current share price of S$1.17, it carries a historical dividend yield of 3.85% (based on its dividend of S$0.045 per share for 2013). This compares favourably against the 2.61% yield that the SPDR STI ETF (SGX: ES3) has; the SPDR STI ETF is an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI).
But, looking at Super Group’s finances alone can’t give us the full picture. The company’s currently facing some business difficulties which has resulted in its revenue and profits falling. It’s hard to tell if this is a temporary or a permanent decline, but at the very least, investors can take heart in the fact that Super Group has a strong balance sheet. As of 30 September 2014, the company has S$82 million in cash and short-term investments and only S$30 million in total borrowings; this gives the firm plenty of resources to try and right its ship going forward.
All told, investors would have to weigh the risks and rewards with Super Group in order to come up with an intelligent investing decision.
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 Super Group.