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Here’s 1 Potentially Great Dividend Share

Credit: Simon Cunningham

For me, great dividend shares have a very important distinguishing feature – strong business fundamentals. (If they happen to have an attractive dividend yield, then that’s just sweet icing on the cake.)

With that, here’s why Kingsmen Creatives Ltd (SGX: 5MZ) might just be a great dividend share.

Makings of a strong yield

When I’m out looking for strong business fundamentals, there’re a few things I like to dig into:

  1. The company’s track record in growing and paying its dividend.

This criterion’s importance lies in the insight it can give investors about management’s commitment to reward shareholders as the business grows.

  1. The company’s ability to grow its free cash flow over time and generate it in excess of the dividends paid.

Ultimately, a company pays its dividends with the cash it has and that cash can from a few sources. A company can 1) take on debt, 2) issue new shares, 3) sell its assets, and/or 4) generate cash from its daily business activities.

There are always exceptions, but it’s generally more sustainable for a company to pay its dividends using the cash it has generated from its businesses.

It thus follows that investors should be keeping a close watch on a company’s free cash flow as it is the cash flow from operations that’s left after the firm has spent the necessary capital needed to maintain its businesses at their current state.

  1. The strength of the company’s balance sheet.

When a company has a weak balance sheet that’s laden with debt, its dividends can be at risk of being reduced or removed – either due to pressure from creditors or from a simple lack of cash – even at the slightest hiccup in the fortunes of its business.

In contrast, a strong balance sheet that is flush with cash gives a company a better ability to tide over tough times and emerge relatively unscathed.

Acing the test

Here’s how Kingsmen has fared against the three criteria over the last 10 years from 2004 to 2014:

Kingsmen Creatives' historical financials

Source: S&P Capital IQ

Although Kingsmen’s dividends have plateaued since 2010, we can see from the chart above that its pay-out of S$0.04 per share in 2014 is still significantly higher than what it was in 2004 (some S$0.0047 per share).

In addition, the company’s free cash flow has also shown an unmistakable upward climb, although there may be some cyclicality in the business which we might want to note.

Kingsmen’s balance sheet has also been rock-solid over the decade under study with its cash levels coming in consistently higher than the amount of borrowings. What’s more, that cash hoard has been steadily growing through the years as well.

A Fool’s take (and icing on the cake)

With those business fundamentals we’ve seen from Kingsmen Creatives, there’s a case to be made for the company to be a great dividend share.

As icing on the cake, the company also has a rather attractive dividend yield of 4.0% based on its current share price of S$1.00 and dividend for 2014. In contrast, the SPDR STI ETF (SGX: ^STI) – an exchange-traded fund which tracks the market barometer, the Straits Times Index (SGX: ^STI) – has a yield of just 2.7% at the moment.

But all that being said, it should be noted that this look at Kingsmen Creatives’ historical financials is not a holistic overview of the overall picture. Investors should still dig deeper into the qualitative aspects of the firm’s business and consider if brighter days are really ahead.

An understanding of Kingsmen Creatives’ financial history is important and can give us some context to gauge its future prospects. But, more work needs to be done beyond that in order to have a better handle on the company’s investing merits (or lack thereof).

For more analyses on dividend investing 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.

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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 Kingsmen Creatives.