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Are The Dividends Of China Merchants Holdings (Pacific) Ltd Sustainable?

When it comes to a track record of paying steady dividends, China Merchants Holdings (Pacific) Ltd (SGX: C22) would be a firm that has aced it, as you can see in the table below.

Year Dividends per share
(Singapore cents)
2004 6.25
2005 5.50
2006 5.50
2007 5.50
2008 5.00
2009 4.50
2010 4.00
2011 5.50
2012 5.50
2013 7.00
2014 7.00

Source: China Merchants Holdings’ website

But that’s all in the past. Can China Merchants Holdings sustain its dividend over the next decade? That would depend entirely on the company’s business fundamentals.

A roadie to success

China Merchants Holdings, which is part of the Chinese state-owned enterprise China Merchants Group, is rather unique for a China-based Singapore-listed company given its sizeable market capitalisation of around S$1.2 billion; most of such companies, which are generally known as S-chips, have tiny market caps.

China Merchants Holdings’ in the business of managing toll roads in China and it currently has five toll roads in its portfolio with concessions to manage all of them for a limited period (expiries for its concessions range from 2021 to 2040).

Although the risk that China Merchants Holdings will lose its concessions in the near future is very low, investors need to be aware that the cashflows coming from the current toll road concessions, which are used to fund the dividend payments, need to be replaced when the concessions expire in time to come.

What this means for China Merchants Holdings is that its management would need to actively source for new toll road concessions when old ones expire in order for the firm to keep up with its dividends.

In the meantime, China Merchants Holdings has seen a big improvement in its ability to generate cashflow from its business over the past two years as you can see in the chart below:

China Merchants Holdings' historical cashflow from operations

Source: S&P Capital IQ

Foolish Summary

Toll roads are a very stable source of revenue for a company. With its current concession rights, China Merchants Holdings would most likely be able to continue dishing out its dividends for now.

But, over the longer term, investors might want to know how management plans to sustain the firm’s payouts after the concession rights for its toll roads expire.

Also, China Merchants Holdings’ high debt level – the firm has a net-debt to equity ratio (where net-debt refers to total borrowings minus total cash) of 36% with most of its assets being in the form of intangible assets related to its concession rights – presents an additional source of risk, though the stability of the toll roads business helps mitigate the risks by a large degree.

Investors need to keep these risks and issues in mind when evaluating the firm’s ability to pay its dividends in the future.

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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 Stanley Lim doesn’t own shares in any companies mentioned.