Is UMS Holdings Limited’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 this in mind, let’s look at the high-yielding UMS Holdings Limited (SGX: S558) and determine if its dividend is in fact, sustainable.

UMS Holdings' historical dividend yield

Source: S&P Capital IQ

UMS Holdings is a high precision manufacturer with a long history in Singapore. The company manufactures high precision semiconductor components as well as other equipment for the electronic, machine tools, aerospace, and oil & gas industries.

A short history

The financial crisis of 2008-09 was a tough time for UMS Holdings. In 2007, the firm’s earnings per share (EPS) was 2.57 cents. By 2008, its EPS had fallen to a mere 0.39 cents; in 2009, UMS Holdings was sitting on a loss of 5.49 cents per share.

Fortunately, with the passing of the crisis, UMS Holdings’ fortunes also turned and it clocked a profit of 6.60 cents per share in 2010. In 2013, the company’s EPS came in at 6.72 cents.

What’s good about it as a dividend share

Ever since the crisis ended, UMS Holdings started to display signs of being a good dividend share. It has been steadily bumping up its dividends and has a comfortable payout ratio. You can see these in the table below:

UMS Holdings' payout ratio

Source: S&P Capital IQ

UMS also has great financial strength; as at 30 September 2014, the firm had S$32.9 million in cash and zero borrowings. Furthermore, UMS has been producing positive free cash flow since 2010. This means that the firm has the ability to sustain its dividends without having to take on debt or raise capital through other means.

UMS Holdings' free cash flow

Source: S&P Capital IQ

All these factors – growing dividends, a comfortable payout ratio, a strong balance sheet, and ability to produce free cash flow – makes it seem like UMS Holdings might indeed be able to sustain its dividends. But, there’s a catch.

The issue at hand.

And that is, UMS Holdings’ business is highly cyclical in nature.

Its customers belong to cyclical industries themselves, such as semiconductors, aerospace, and oil & gas. In addition, UMS Holdings’ business depends on the level capital expenditures its customers are willing to spend. Such spending might get cut unexpectedly if there are business downturns in the industries which UMS Holdings’ customers are in.

Thus, the question is not “If”, but “When” UMS Holdings would face another inevitable downturn. And when the time comes, there’s no guarantee that UMS Holdings’ dividends can hold up.

Foolish Summary

UMS Holdings has been a great company to invest in over the past five years. Investors who have invested in the company since the start of 2010 would have enjoyed gains of 574% with dividends reinvested.

But, due to the cyclical nature of UMS Holdings’ business, dividend investors might need to prepare themselves for dividend cuts every now and then when the company is experiencing a market slowdown. It has happened before – UMS’ dividend of 1.88 cents per share in 2006 had been slashed to 0.4 cents and 0.8 cents in 2008 and 2009 respectively.

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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 doesn’t own shares in any companies mentioned.