Is Nera Telecommunications Ltd’s High Dividend Sustainable?

Credit: Simon Cunningham

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 the high-yielding Nera Telecommunication Ltd (SGX: N01) and determine if its dividends are actually sustainable.

Nera Telecommunications' dividend yield

Source: S&P Capital IQ

Nera Telecommunication has a very interesting business model. It has four business segments, namely, Telecommunications, Infocommunications, Network Infrastructure, and Payment Solutions.

Under these four segments, the company offers products and services that range from marine satellite communications to wireless broadband access and from network solutions to point of sales terminals used in retail outlets.

Despite having its fingers in a number of different pies, Nera Telecommunication has had trouble growing its revenue over the years. In 2013, the company’s revenue of S$178.2 million was only 7.1% higher than its revenue of S$166.4 million in 2007. Meanwhile, the firm’s operating profit did somewhat better, as the metric grew from S$14.1 million in 2007 to S$20.4 million in 2013.

The firm has also been paying out consistent dividends over the past eight years at least, but its dividend payout ratio (dividends per share dividend by profit) has been close to 100% or more.

Nera Telecommunications' payout ratio

Source: S&P Capital IQ

So, at first glance, there aren’t that many things to like about Nera Telecommunications as a dividend share given its lack of growth and a payout ratio that leaves little room for error.

But, a closer look would reveal that there are actually positives with this company. For instance, the firm has generated positive free cash flow in each year since 2007.

Moreover, parts of its business are highly recurring in nature. We can take Nera Telecommunications’ payment solutions segment as an example. It charges regular maintenance fees and rental fees, and even gets to pocket a fee based on the percentage of every transaction that goes through its payments platform.

Then, there is also Nera Telecommunications’ strong balance sheet where there is S$27.7 million in cash and equivalents and just S$4.7 million in borrowings. This provides even more comfort for dividend investors.

With Nera Telecommunications’ streams of recurring revenue, a history of generating free cash flow, and a rock solid balance sheet, it appears that shareholders can enjoy the company’s dividend for some time to come if no major disruption to the firm’s business happens.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

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.