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A Better Tourism Dividend Stock: Genting Singapore PLC or Straco Corporation Ltd?

Investors might not often associate Genting Singapore PLC (SGX: G13) with Straco Corporation Ltd (SGX: S85).

But, their businesses do have some strong common themes with the biggest one being that both of them are largely dependent on tourism spending in Singapore.

Genting Singapore counts the iconic local tourism landmark Resorts World Sentosa (home to a casino, theme parks, hotels, a huge oceanarium, and food & beverage outlets amongst other attractions) as its main business asset.

Meanwhile, Straco’s business depends on the Singapore Flyer in Singapore (a giant Ferris wheel located near Singapore’s Central Business District; currently Straco’s largest asset) and two aquariums in China.

With that, let’s take a closer look at Genting Singapore and Straco’s business fundamentals to decide which might be the better choice for income investors who would like exposure to the tourism sector.

Yield

At Genting Singapore’s current share price of S$0.955, it has a dividend yield of 1.05% based on its annual dividend of S$0.01 per share in 2014.

Meanwhile, Straco’s yielding some 2.05% based on its current price of S$0.97 and dividend of S$0.02 per share for the same period as above.

Growth in dividends

Of the pair, Straco’s the only one that has managed to grow its annual dividend over the past five years as you can see in the chart below.

Genting Singapore and Straco's annual dividends

Source: S&P Capital IQ

The growth has also been impressive as Straco has managed to quadruple its annual dividend from a base of 0.5 cents per share in 2009 to 2.0 cents today.

As for Genting Singapore, it has had a short history with paying a dividend as its first annual payout of S$0.01 per share occurred only in 2011; since then, it has kept its dividends at the same level.

Pay-out ratios

In terms of the pay-out ratio (dividends as a percentage of free cash flow), this is where Genting Singapore outshines Straco.

Genting Singapore and Straco's payout ratio

Source: S&P Capital IQ

As you can observe in the chart above, Genting Singapore’s payout ratio has been much lower than that of Straco since 2012. That being said, it should be noted that Straco’s pay-out ratio of less than 50% in the period under study can already be considered to be very healthy.

Growth potential

From 2010 (the year Resorts World Sentosa first opened its doors) to 2014, Genting Singapore has seen its revenue inch up by merely 1.2% per year on average from S$2.73 billion to S$2.86 billion. Over the same timeframe, its operating cash flow has actually shrank from S$1.41 billion to S$956 million.

Meanwhile, Straco has done much better. For that same span of time, the company has nearly doubled its top-line from S$51.6 million to S$92.3 million and grew its operating cash flow by 140% from S$26.5 million to S$37 million.

So, historically, Straco clearly has the lead on Genting Singapore when it comes to growth. What about the future though?

Genting Singapore’s currently in the midst of developing the S$2.5 billion Resorts World Jeju in South Korea’s Jeju Island. Management’s “confident that RWJ will be a magnet for the regional tourist market, where within a flying radius of 2 hours, there is a sizeable population of 750 million.”

The resort operator also has other tricks up its sleeve to boost growth, such as the planned opening of a new 550-room hotel in the Jurong Lake District in Singapore in the second quarter of this year. Resorts World Sentosa currently has more than 1,500 rooms; a one-third increase in room capacity can help Genting Singapore drive more visitors to its flagship attraction.

That said, there are reasons for caution too. In Genting Singapore’s 2014 fourth-quarter earnings release, it mentioned that the “macro-economic ecosystem has been altered to an extent that the gaming industry has to adjust to a new norm.”

Instead of a focus on the premium gaming segment, the company has been targeting the “foreign premium mass and mass market segments.” It remains to be seen if the strategy-switch would be successful.

As for Straco, its attractions in China appear to have the winds on their back given the following comments from the company in its 2014 third-quarter earnings release:

“Despite slower economic growth, China plans to boost the country’s tourism industry through a series of new measures and spending, according to guidance released by the State Council in August. This augurs well for the Group.”

Meanwhile, the acquisition of the Singapore Flyer by Straco last November also gives the firm potential for strong top- and bottom-line growth in 2015 and beyond.

It’s not all a bed of roses for Straco however – the Singapore Flyer has been a tough asset to run given that it fell into receivership in 2013 before Straco acquired it. It’s hard to tell if Straco’s operational chops would be sufficient to turnaround the struggling tourist landmark.

Balance sheet strength

As of end-2014, both Genting Singapore and Straco had pretty strong balance sheets with net-cash positions. But, Genting Singapore has the lead here given that its total debt to equity ratio of 17.6% is better than Straco’s selfsame figure of 48%.

We have a winner here!

In summary, Genting Singapore has the stronger balance sheet and lower pay-out ratio. But, Straco’s the one with the higher yield and faster growth in both its dividends and business.

So, it seems like Straco has just about edged ahead of Genting Singapore here.

But all that said, it’s important to note that Straco need not necessarily be a good investment. Besides the possibility that Straco may just be the better block in a bad neighbourhood, important issues like its valuation and the integrity of its management team have yet to be considered

For more analyses about 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 Straco Corporation.