Can You Count On This Share With A 4.6% Yield For Consistent Dividends?

Investors looking for an attractive dividend yield right now might have come across palm oil producer Mewah International Inc (SGX: MV4).

The company has a tasty yield of 4.6% at its current share price of S$0.37 thanks to its annual dividend of 1.283 US cents per share (around 1.7 Singapore cents) at the moment.

In comparison, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI) – has a yield of just 2.6% currently.

But while Mewah might have a market-beating yield now, it does not necessarily mean that the palm oil outfit would make for a good dividend share. Investors should look underneath the hood and determine if Mewah can be counted upon for consistent – or even better, growing – dividends.

Makings of a sustainable dividend

Generally speaking, there are a few things I like to look at when I’m digging into a company’s business to see if it can maintain or improve its dividends over time:

  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 actual 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 an ability to tide over the inevitable tough times that rolls along every now and then.

A thumbs down here

Here’re two charts showing how Mewah has fared against the three criteria from 2011 to 2014 (Mewah was listed only in November 2010):

Mewah International's dividends and free cash flow

Mewah International's balance sheet figures

Sources: S&P Capital IQ

In Mewah’s relatively short existence as a publicly-listed company, it has not only managed to pay an annual dividend in each year, it has also grown those payouts. That’s a commendable effort.

But, there are some worrying signs too. Besides the inability to churn out free cash flow, Mewah has also had a weak balance sheet that’s been laden with debt for the timeframe under study.

A Fool’s take

Given what we’ve seen – the erratic free cash flows and the weak balance sheet – it seems like there’s a chance that Mewah can’t be counted upon to deliver steady dividends.

That being said, it’s worth noting that this look at Mewah’s historical financials is not a holistic overview of the entire picture. Investors would still have to drill into the qualitative aspects of the firm’s business and consider if better days are ahead.

A study of Mewah’s financial history can be important and informative, but more work definitely needs to be done beyond that before any investing decision can be reached.

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.