Great income shares are those which can deliver growing dividends for their investors in the years ahead. I’m guessing most investors wouldn’t turn down such investments. Question is, how can one find such shares? To help with that, here are some clues investors can look at: A company’s track record in growing its dividend. This is important as it gives investors insight on management’s commitment in rewarding shareholders as the company grows. A company’s ability to grow its free cash flow and generate free cash flow in excess of dividends paid. Dividends are paid using the cash a company has….
Great income shares are those which can deliver growing dividends for their investors in the years ahead. I’m guessing most investors wouldn’t turn down such investments. Question is, how can one find such shares? To help with that, here are some clues investors can look at:
- A company’s track record in growing its dividend. This is important as it gives investors insight on management’s commitment in rewarding shareholders as the company grows.
- A company’s ability to grow its free cash flow and generate free cash flow in excess of dividends paid. Dividends are paid using the cash a company has. There are a few primary sources a firm has to acquire that capital – it can borrow money, issue new shares, or simply generate it from its daily business activities. Although there are always exceptions, it’s generally more sustainable for a company to fund its dividends predominantly using cash that’s generated from its businesses. So, investors should watch a company’s free cash flow as it is the cash that’s left after the necessary capital’s being spent to maintain the company’s businesses at their current state.
- The strength of the company’s balance sheet. Companies with weak balance sheets that are laden with debt are generally at higher risk of having to cut their dividends when business slows down temporarily. A strong balance sheet that is flush with cash thus gives a company plenty of room for error to tide over tough times.
With this three criteria in mind, a company like healthcare provider Raffles Medical Group Ltd (SGX: R01) might turn out to be a great income share despite its low dividend yield currently. At today’s price of S$3.88 per share, the company carries a historical yield of just 1.29%. In contrast, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the local market barometer the Straits Times Index (SGX: ^STI), has a yield of some 2.6%.
Source: S&P Capital IQ
From the chart above, we can see that Raffles Medical’s dividends have grown steadily in the decade between 2003 and 2013; meanwhile the company’s free cash flow has also displayed an unmistakable upward trend and has, for the most part, been higher than the dividends paid. These are things we want to see as investors.
Raffles Medical’s balance sheet has also been fortress-like for much of the decade ended 2013; the firm has held more cash than debt for almost every year besides 2007.
A Fool’s take
A quick glance at Raffles Medical’s financials has the company ticking all the right boxes. But that said, it should be noted that a study of the company’s finances alone can’t give us the full picture. We’d still need to consider the future of Raffles Medical’s business and the risks it might face.
When it comes to Raffles Medical’s growth opportunities, one that stands out would be the expansion of Raffles Hospital, the company’s flagship hospital (it accounts for almost two-thirds of the company’s total revenue). The company announced on Monday that the groundbreaking ceremony for the expansion had been held on the same day. The project’s expected to take two years to complete and when it’s done, Raffles Hospital’s gross floor area would increase by almost 70%.
The company’s management team has high hopes for the project, with Executive Chairman Dr Loo Choon Yong commenting that the “expansion will offer Raffles Hospital a 10-year runway that will benefit patients in new ways.”
Although the growing hospital does carry great promise, Raffles Medical would likely face stiff competition in the years ahead. For example, as of August 2014, analyst reports had noted that seven new hospitals, with a total of 3,770 beds, are slated to be completed by 2020. This is just one of the challenges Raffles Medical has to overcome.
All told, investors would need to weigh the risks and rewards to come up with an intelligent investing decision.
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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 Raffles Medical Group.