This Is 1 Share That Could Give You Healthy and Growing Dividends

Healthcare services provider Raffles Medical Group Ltd (SGX: R01), with its dividend yield of 1.2% currently (thanks to its present share price of S$4.55 and annual dividend of S$0.055 per share in 2014) would in no way attract the attention of income investors who are seeking high yields.

For some perspective on how low the company’s dividend yield is, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking Singapore’s market barometer the Straits Times Index (SGX: ^STI) – has a yield of 2.7% at the moment.

But just because Raffles Medical has a low yield now does not mean that it won’t be a solid dividend play. There are signs that it may just be a share that could please even the most demanding of income investors with its potential in being able to distribute growing dividends in the years ahead.

The foundations of a strong and growing dividend

When it comes to the quest of seeking companies with the ability to deliver steadily rising dividends over time, there are a few things in general that I like to assess about a firm:

  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. The higher the company’s free cash flow can be over time, the larger the potential for growing dividends.

  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.

On the other hand, a strong balance sheet that is flush with cash gives a company the resources to protect its dividends during the inevitable tough times that rolls along every now and then.

A healthy dividend

The two charts below show how Raffles Medical has fared against the three criteria over the past decade from 2004 to 2014:

Raffles Medical's total dividends and free cash flow (FCF) per share

Raffles Medical's balance sheet figures (2004 to 2014)

Source: S&P Capital IQ

As you can see, the healthcare services provider has excelled.

Besides having dividends which have steadily climbed over time (the picture will look even better if we had focused on just the firm’s ordinary dividends instead of looking at both ordinary and special dividends), Raffles Medical has also generated growing free cash flow that has come in higher than its dividends for the most part.

Meanwhile, there isn’t much to be picky with when it comes to the strength of Raffles Medical’s balance sheet – the firm has carried minimal or negligible amounts of borrowings most of the time. At the end of 2014, Raffles Medical had S$150 million in cash on hand and just S$6.4 million in debt.

A Fool’s take

There are clearly a number of important things to like about Raffles Medical when it comes to its potential in being able to pay growing dividends in the future. But, it’s worth stressing that this look at the healthcare services provider’s historical financials is not a holistic overview of the entire picture.

Investors would still need to investigate the qualitative aspects of the company’s business and consider the odds of the firm’s ability to grow. A study of Raffles Medical’s financial track record can be important and informative, but more work needs to be done beyond that before any investing decision can be made.

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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 Raffles Medical Group.