This Share Might Help Scratch Your Urge for a Growing Dividend

I’d say it straight: Tourism asset owner Straco Corporation Ltd (SGX: S85) is not a share that can set a dividend investor’s heart aflutter at the moment.

At its current price of S$1.00, Straco has a yield of just 2% thanks to its annual dividend of S$0.02 per share in 2014. In contrast, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has a yield of some 2.7%.

It’s thus quite clear that Straco’s yield isn’t anything special at the moment. But, it may still be a share that could be a nice source of growing dividend-income in the years ahead.

Rock-solid dividends

Straco first paid a dividend in 2006 and back then, the payout was just S$0.0025 per share. But, the company’s dividends have since grown eight fold to S$0.02 in 2014 as mentioned earlier – that’s an admirable track record of dividend-growth.

In addition, the firm has also been adept at growing its free cash flows over the years. It’s worth pointing out that the tourism asset owner’s free cash flows have been comfortably higher than its dividends and that’s a source of strength; it gives the company lots of room of error and also signals the potential for higher dividends in the future.

These are all encapsulated in the chart below:

Straco's dividends and free cash flow

Source: S&P Capital IQ

Investors may also take heart in the fact that Straco has a strong balance sheet; as of 31 March 2015, the company had S$123.5 million in cash and just S$90.7 million in borrowings. This helps add to the margin for error that Straco has in protecting its payouts when there are temporary setbacks in its business.

Pegged for growth

There are also some clear drivers for growth which may help Straco improve its cash flows in the future.

In November 2014, the company completed its acquisition of the iconic Singapore tourism landmark, the Singapore Flyer. The acquisition has provided a major boost to Straco’s financials so far.

In the first quarter of 2015, Straco had enjoyed a 71.5% year over year spike in revenue to S$25.2 million and a 60.5% jump in profit to S$8.7 million. The firm’s cash flows were also juiced up, with operating cash flow surging manifold from S$853,000 a year ago to S$11 million. All these had come about largely due to the inclusion of the Singapore Flyer in Straco’s asset base.

An increase in the price of admission tickets for Straco’s other two important assets – the China-based Shanghai Ocean Aquarium and Underwater World Xiamen – are also set to take place in the second half of 2015.

Straco's historical revenue and visitor growth

Source: Straco’s filings

The table above shows how the growth of Straco’s ticketing revenue has significantly outpaced the already impressive increase in the number of visitors to the two aquariums over the years – that’s a sign that the two assets do possess strong pricing power. Given this, there’s a chance that the upcoming price increases for the aquariums would be able to benefit Straco.

Lingering risks

The acquisition of the Singapore Flyer as well as the presence of strong pricing power in the two Chinese aquariums could help power Straco’s cash flows higher in the future.

But, investors should also be mindful of the risks involved.

Prior to being acquired by Straco, the Singapore Flyer was placed under receivership in May 2013 and that’s a sign that the tourism landmark may not be an easy one to run. Furthermore, my colleague Stanley Lim had previously pointed out that huge tourism projects are currently in the works in Shanghai (for instance, there’s the Shanghai Disneyland and the Haichang Ocean Park) and when they’re ready, they might become formidable competitors for the Shanghai Ocean Aquarium to deal with.

There are certainly things to like about Straco’s future as a dividend share, but investors would need to weigh the risks and rewards with the firm 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.

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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.