Can High-Yielding Singapore Exchange Limited Sustain Its Dividend In The Future? Part 1

Singapore Exchange Limited (SGX: S68) – or more popularly known as SGX – has seen its share price go pretty much unchanged over the last five-plus years.

The company’s shares traded at $7.10 on 30 June 2009 and closed yesterday with a price of $7.67. Over the same timeframe, the capital gains of the SPDR STI ETF (SGX: ES3) was 41%. The SPDR STI ETF is a proxy for the market barometer, the Straits Times Index (SGX: ^STI).

Over its past five financial years – from the financial year ended 30 June 2010 (FY2010) to FY2014 –  SGX has managed to distribute a steady annual dividend totaling around $1.37 per share.

Period Dividend per share (Singapore cents)
FY2010 27
FY2011 27
FY2012 27
FY2013 28
FY2014 28

Source: Investor Relations Website for SGX

The company’s steady dividend and relatively high yield (shares of SGX have a historical yield of 3.6% based on its dividend for FY2014 and a share price of S$7.67) might make it an attractive target for Foolish income investors. But, a look behind the curtain is still warranted in order for us to understand how the company can support its dividend in the future.

A closer look

SGX gets its revenue from a number of different sources, namely, Securities, Derivatives, Market Data and Connectivity, Depository Services, Issuer Services, and Others.

The share market operator levies fees from the listing of securities, as well as for the clearing of securities trades and derivative contracts. The company also earns its keep by providing market data feeds for risk management and back office applications.

As the only local bourse (stock exchange) in Singapore, SGX holds a monopoly position. As of the end of December 2013, the Singapore share market had 775 companies listed, with a total market capitalization of close to S$1 trillion.

What does the future hold for SGX-1

Source: Company’s Earnings Report

The growth of SGX’s revenue has been rather tepid over its past five financial years (FY2010 to FY2014); the firm’s revenue had been growing at less than 2% per year. Of the five major sources of revenue, the Securities segment has suffered a fall in revenue of more than 23% over the period above. Meanwhile, the Derivatives segment has been the clear driver of revenue growth, with sales up north of 59% in total over that five year period.

Both segments contribute a significant part of SGX’s total revenue. For FY2014, the Securities segment made up 33% of SGX’s total sales, while Derivatives came in at a close second with 30%.

As the revenue of SGX depends on the amount of trading activity in Singapore’s share market, we can look at the trends in trading activity for further clues.

 SGX Trading Activity

Source: Company Earnings Report

From the graph above, we can see that the SDAV has trickled down since FY2010. In fact, the value of securities traded daily has dipped noticeably in FY2014.

This trend has continued into the current financial year, and was not helped by the occurrence in 2014 of two trading disruptions within a month. Although my colleague Ser Jing believes that these disruptions shouldn’t matter for investors, it’s a different ballgame for SGX – the bourse operator may suffer reputational risks when companies consider their options for a listing in Asia.

That said, the number of derivative contracts has continued to rise over the past five financial years and is an increasingly important source of revenue for SGX.

Foolish summary

The exercise above is to look at SGX’s sales dynamic alone. As a next step, we should observe if the top-line growth can be effectively turned into cash in order for the company to sustain its dividend.

But, that’s for the next article.

At SGX’s closing price yesterday, the company’s shares are traded at a trailing price to earnings ratio of about 27, and – as mentioned earlier – carry a dividend yield of around 3.6%.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.