Can This Share With An Attractive Dividend Yield Of 4.6% Sustain Its Dividends?

A high dividend yield can be an attractive thing for investors, but that’s provided the share’s yield is backed by strong business fundamentals.

Otherwise, those payouts can easily shrink in the future if the share’s business condition deteriorates.

Keeping these in mind, what should we make of Aspial Corporation (SGX: A30)?

At the conglomerate’s (Aspial has business interests in jewellery retail, property development, and pawn-broking) current share price of S$0.39, it has an attractive yield of 4.6% based on its dividend of 1.8 Singapore cents per share for the whole of 2014.

In comparison, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has a yield of just 2.7% at the moment.

The anatomy 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 pressures 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.

Scoring the firm

Here’re two charts which show how Aspial has fared against the three criteria:

Aspial's dividends and free cash flow

Aspial's balance sheet figures

Source: S&P Capital IQ

As you might have been able to tell from the charts, Aspial hasn’t scored too well.

Over the 10 year period from 2004 to 2014, Aspial’s dividends have climbed, but they’ve been very erratic as well. The company’s free cash flow has also been negative for the most part with the financial metric showing signs of a sustained decline.

Aspial’s balance sheet has also been weak with its borrowings exceeding the level of cash throughout the period under study. It’s worth noting too that the firm’s borrowings have grown at a significantly much faster pace than its cash holdings.

A Fool’s take

Given what we’ve seen with Aspial – the firm’s erratic dividends, inability to generate free cash flow, and a steadily weakening balance sheet – there’s a chance that the company’s current level of dividends may not be sustainable.

That being said, it’s important to note that this look at Aspial’s historical financials is certainly not a holistic overview of the overall picture. Investors would still have to dig into the qualitative aspects of the firm’s business and consider if better days really are ahead.

A study of Aspial’s financial history can be important and informative, 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 doesn't own shares in any company mentioned.