Is Aspial Corporation’s High Dividend Sustainable?

A high dividend yield is an important factor for many income investors when it comes to selecting shares for investment.

But, the most important consideration has to be whether the company’s dividends are sustainable. If a high-yielding share has to cut its dividends in the future, investors would not only lose dividend-income from that company, they would also likely suffer losses due to a share price decline.

With these in mind, let’s take a look at Aspial Corporation (SGX: A30), a property developer, financial services provider, and jewellery retailer that carries a very attractive-looking historical dividend yield of 9.0%.

Dividend for whole of 2013 3.50 cents
Current share price S$0.39
Historical dividend yield 9.0%

Source: S&P Capital IQ

A diamond in the rough… or is it?

Aspial has been an incredibly fast-growing company in Singapore’s stock market; the firm’s net income has increased from just S$6.9 million in 2003 to more than S$67.5 million in 2013, representing an annualised compounded growth rate of 25.6%.

But, 2014 hasn’t been kind to Aspial as its net income for the 12 months ended 30 September 2014 was only S$47 million, meaning to say the company has been seeing profit declines throughout the first nine months of 2014.

Based on Aspial’s earnings for the 12 months ended 30 September 2014 and its dividends for the whole of 2013, the firm’s payout ratio (dividends per share divided by earnings per share) stands at 131%. This means to say that the firm’s paying out more than what it earns – that’s not a good sign.

Furthermore, Aspial has also been fuelling its growth largely through the use of debt. This can be seen in how the firm’s total debt to equity ratio had grown from 74% at the end of 2003 to 292% as at end-September 2014.

Along the way, the firm’s EBITDA to interest expense ratio (a measure of how easily a company can service its borrowings) has also fallen dramatically from 21.6 to only 2.2.

To fund growth, Aspial seems to be taking more and more financial risks.

Aspial’s falling earnings, growing leverage, and shrinking ability to service its loans are all worrying signs for investors; the firm might have a high dividend yield at the moment, but there’s a risk that its dividends may not be sustainable.

Interestingly, there is a twist here and that is, Aspial’s dividends have been paid to its shareholders mainly in the form of new shares through the firm’s scrip dividend scheme (a scrip dividend scheme is one where a firm issues shares as dividends instead of paying cash). In other words, there isn’t a high cash outflow for Aspial even when it has to ‘pay’ its dividends.

Without the need to fork out much cash, Aspial’s dividend could actually be sustained. But that doesn’t mean investors will ultimately benefit.

A scrip dividend programme can result in the dilution of a company’s earnings per share if the firm’s earnings are not growing at an adequate pace. This can then result in a falling share price. The combined effects of a falling share price and ownership of ever increasing number of shares (through the issuance of new shares as per a scrip dividend programme) may not be a net-positive for Aspial’s investors.

Foolish Summary

A high dividend yield should act only as a starting point for investors to conduct a further study of a share and should not be used as a primary investing-determinant.

More often than not, there are good reasons for a company’s shares to carry a high dividend yield. And, those reasons are sometimes issues like a firm having poor future business prospects or carrying dangerously-leveraged balance sheets.

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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 Stanley Lim does not own shares in any companies mentioned above.