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Is Venture Corporation Ltd’s 6.5% Dividend Yield Worth Chasing? – Part 2

Hello, and welcome to the second part of the series on Venture Corporation Ltd’s  (SGX: V03) future as a dividend stock.

As a quick recap: Venture traded at a historical dividend yield of 6.5% as of yesterday’s closing price of $7.74 (thanks to its dividend of S$0.50 per share in 2014). Over the years, the electronics manufacturing services provider has been paying steady dividends.

Financial year ended 31 December Venture’s dividends per share
2010 S$0.55
2011 S$0.55
2012 S$0.50
2013 S$0.50
2014 S$0.50

Source: Morningstar

I had looked at Venture’s revenue by product line in the previous article. In here, I’ll look at two important drivers for the company’s dividends – its free cash flow and its balance sheet.

A closer look

FCF Dividends Venture

Source: Venture’s earnings report

The graph above shows the free cash flow (operating cash flow minus capital expenditures) Venture has generated versus the amount it has paid in dividends.

As you can observe, there is only one year (2011) in the period studied where the company’s free cash flow exceeded the dividends paid. This also means that Venture has been paying out most of its free cash flow – and then some – for the past five years.

Ideally, we would want the company’s dividends to be funded by its business operations. Otherwise, Venture may have to dip into its cash holdings, or worse, borrow money, to fund the gap.

This brings me to Venture’s balance sheet.

Balance Sheet Venture

Source: Venture’s earnings report

The impact of Venture’s dividend payouts on its balance sheet is clear. From a net cash position (cash and equivalents minus debt) of $314 million in 2011, Venture’s balance sheet has since weakened with the net cash position shrinking to $224 million in 2014.

A Fool’s take

At the moment, Venture’s free cash flow is inadequate when it comes to supporting its dividends. This could be one reason why the firm chose to reduce its dividend payout slightly from S$0.55 per share in 2011 to S$0.50 per share in 2012.

All is not lost however – the gap between the company’s free cash flow and dividend has narrowed in 2014. Additionally, there are also growth initiatives that Venture is pursuing which could drive its future cash flows higher. As such, we should keep an eye out on the company’s growth initiatives and see where it can go from here.

For the cautious Foolish investor, he or see may want to demand a higher margin of safety to protect against any downside. At the moment, Venture may be cutting it close with its less than ideal dynamic between its free cash flow and dividends.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.