Companies that can continually increase their dividends over the years can be wonderful investments. The experience of the Goldman Sachs Rising Dividend Growth Fund, while by no means a comprehensive study on the topic, can still be an instructive example. The fund selects shares for its portfolio based on two main criterion. A share must have (1) annual dividend increases of at least 10% on average, and (2) a track record of at least 10 years of consecutive dividend growth. The fund calls this the “10/10 test.” Since its inception in March 2004, the fund has generated an annualised total…
Companies that can continually increase their dividends over the years can be wonderful investments. The experience of the Goldman Sachs Rising Dividend Growth Fund, while by no means a comprehensive study on the topic, can still be an instructive example.
The fund selects shares for its portfolio based on two main criterion. A share must have (1) annual dividend increases of at least 10% on average, and (2) a track record of at least 10 years of consecutive dividend growth. The fund calls this the “10/10 test.”
Since its inception in March 2004, the fund has generated an annualised total return of 8.75%, outpacing the S&P 500’s (a broad market index in the U.S.) total return of 7.88% over the same period.
Keeping the efficacy of investing in dividend-growers in mind, here are two shares in our local market that have had six years of consecutive annual dividend growth: Vicom Limited (SGX: V01) and Raffles Medical Group Ltd (SGX: R01).
Six years of dividend increases might not exactly be a stellar track record yet, but the duo have at least been doing something right. Here’s how their dividends have looked like since 2008:
Source: S&P Capital IQ
Vicom’s a testing and inspection outfit. Besides dominating the vehicle testing and inspection scene (it runs seven of nine such centres located in Singapore), the company’s services are also employed in fields as diverse as oil & gas, aerospace, marine, food, electronics, and construction amongst others.
The company’s latest earnings release saw its annual earnings per share for 2014 grow by 5.8%. While Vicom’s management is often tight-lipped about its future plans, the company’s at least confident about growth in the year ahead for parts of its business as seen from the following statement given in the earnings announcement:
“The demand for the vehicle testing services is expected to moderate as more vehicles are expected to be deregistered in the year. The non-vehicle business is expected to grow even though competition remains keen.”
Moving on, Raffles Medical Group’s a healthcare provider which operates more than 100 clinics and medical centres across Singapore. The company’s flagship is Raffles Hospital, which provides tertiary medical care.
2014 saw the company kick in with top-line growth of 10%. Meanwhile, profit grew by 6.5% after adjusting for one-off gains in 2013. Two of Raffles Medical’s clearest drivers of future growth are its expansion of Raffles Hospital and the construction of a medical/retail centre at Holland Village.
According to updates about the two given in Raffles Medical’s latest fiscal fourth-quarter earnings release earlier this month, the Raffles Hospital extension – which would see the hospital’s gross floor area increase by nearly 80% – has already started construction works. Once completed in the first quarter of 2017, the extension “will offer significant scope for Raffles Hospital’s expansion and growth over the next 10 years.”
As for the Holland Village project, construction is already well underway and it’s slated for an opening in the first quarter of 2016. The building will have 65,000 square feet of space of which 9,000’s “dedicated to medical and specialist services for both local and expatriate patients.” The remaining floor area will be occupied by tenants offering banking, lifestyle, and F&B services.
A Fool’s take
Both Vicom and Raffles Medical have a nice history of consecutive dividend increases and potential room for future growth. These are good signs pointing to their ability to continue growing their dividends.
But crucially, investors shouldn’t stop there. The companies’ balance sheet and cash-flow dynamics would also need carefully study.
In addition, the matter of valuation should also be of concern. There’s no use getting nice dividend increases if our capital’s being eroded due to expensive shares being brought down to earth – a share’s total return (dividends plus capital gains) is what’s important.
At Vicom and Raffles Medical’s current share prices of S$6.48 and S$3.92, they are carrying trailing price-to-earnings (PE) ratios of 19 and 32 respectively – these aren’t low valuations. For some perspective, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI), is valued at just 14 times its trailing earnings.
Investors interested in the two companies would have to dig in further and weigh the risks and rewards.
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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 Vicom and Raffles Medical Group.