Want Growing Dividends? Try This Share

Healthcare services provider Raffles Medical Group Ltd (SGX: R01) would likely not attract any attention from investors who would like a nice dividend yield.

At its current share price of S$4.19, Raffles Medical has a historical yield of only 1.3% thanks to its annual dividend of S$0.055 per share in 2014. In contrast, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the Straits Times Index (SGX: ^STI) – has a yield more than twice that at 2.7%.

But, there’re signs that Raffles Medical can reward its shareholders with growing dividends in the years ahead.

Strong fundamentals

A look at the firm’s dividend track record over the past decade would show that it has been able to grow its payout over time.

On top of that, Raffles Medical has also seen its free cash flow step up through the years; it’s worth noting too that the healthcare outfit’s free cash flow comes in comfortably higher than its dividends paid and that gives the company plenty of room for error and also points to the potential for higher dividends in the future.

You can see these in the chart below:

Raffles Medical's dividends and free cash flow

Source: S&P Capital IQ

Raffles Medical’s balance sheet is also in the pink of health and that’s another source of comfort for investors when it comes to the firm’s margin for error in protecting its payouts when dealing with temporary downturns in its business environment; as of 31 March 2015, the healthcare services provider has S$121 million in cash and just S$6.7 million in total borrowings.

The rock-solid balance sheet Raffles Medical has also affords it the ability to pounce forcefully on growth opportunities whenever they appear without having to worry about stretching its finances thin. This brings me to the company’s future plans.

Healthy growth ahead

Raffles Medical currently has three key growth-drivers.

The first is the expansion of its flagship Singapore-based Raffles Hospital. The hospital has a gross floor area of 300,000 square feet at the moment and the company’s busy at work now developing a 220,000 square feet extension in an adjacent site.

The new wing’s scheduled to be completed in the first quarter of 2017 and management has high hopes for it as they commented that it “will offer significant scope for Raffles Hospital’s expansion and growth over the next 10 years.”

Next, we have the firm’s plans to develop a 65,000 square feet medical/retail centre in the Holland Village area of Singapore. Besides earmarking 9,000 square feet of space for the provision of medical and specialist services there, Raffles Medical also has plans to rent out the remaining area to DBS Bank (an anchor tenant) as well as retail and food & beverage outfits. The centre is expected to open in the first quarter of 2016.

The last represents the first significant push to enter China’s healthcare market by Raffles Medical. Last week, the company announced that it’d be entering into a joint-venture to develop the 400-bed Shanghai New Bund International Hospital Project.

It’s an intriguing opportunity for the company considering that Raffles Hospital has a registered total bed capacity of only 380 (there are currently less than 200 operational beds in the hospital). Raffles Medical will also be working with a strong partner for this new project – the Shanghai LuJiaZui Group’s a state-owned enterprise and it’s been responsible for the development of Shanghai’s financial district.

All three projects can pave the way for the generation of even higher levels of cash flow for the company in the future, cash flows which can help fund higher dividends.

But strong competition looms too

Despite a seemingly bright future, we should be aware that risks are present for Raffles Medical too with the level of competition being a key one to watch; as of August 2014, analyst reports had shown that seven new hospitals in Singapore, with a total of 3,770 beds, are expected to be built by 2020.

Moves into China should also be carefully observed. Raffles Medical will be solely in charge when it comes to the provision of healthcare services within its new Shanghai hospital. The company does have experience in the Chinese city as it has a medical centre there, but running a hospital can be a completely different ball-game altogether.

A Fool’s take

Raffles Medical’s dividend yield might be tiny now, but it does have a strong set of fundamentals and growth opportunities which may help power its dividends higher in the future. That said, there also areas of concern that bears watching, such as the growing level of competition in Singapore.

All told, investors would have to weigh the risks and rewards with Raffles Medical in order to come up with an intelligent investing decision.

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.

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

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 Raffles Medical Group.