Is Singapore Press Holdings Limited A Good Blue Chip Stock For Dividends?

Credit: Simon Cunningham

At its current price of S$4.20, newspaper publisher and property developer Singapore Press Holdings Limited (SGX: T39) has a juicy historical dividend yield of 5.0% thanks to its annual dividend of S$0.21 per share in FY2014 (fiscal year ended 31 August 2014).

The company’s yield is one of the highest amongst the 29 other blue chips that make up Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

In addition, it’s also nearly double the 2.7% yield that the SPDR STI ETF (SGX: ES3) carries; the SDPR STI ETF happens to be an exchange-traded fund which closely mimics the fundamentals of the Straits Times Index.

But, Singapore Press Holdings’ high yield does not mean it’d make for a good dividend stock, one which can maintain or even grow its dividends in the future. What really matters here is the share’s business fundamentals.

The building blocks for a strong dividend

There are some things in general that I like to dig into when I’m trying to figure out the chances that a company can sustain or raise its dividends in the years ahead:

  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.

Dividends are ultimately paid using the cash that a company has and that can come 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.

In addition, it enables the firm to go on the offensive during a downturn and reinvest for growth even as its financially weaker competitors have to batten down the hatches; this plants the seeds for potentially higher dividends in the future.

Singapore Press Holdings’ dividend: Yay or nay?

What we have immediately below are two charts showing how Singapore Press Holdings has fared against the three criteria over the past decade:

Singapore Press Holdings' total dividends (ordinary plus special) and free cash flow (FCF) per share (1)

Singapore Press Holdings' balance sheet figures

Source: S&P Capital IQ

Let’s have a few words about what we can see, starting with the praiseworthy. Over Singapore Press Holdings’ last 10 fiscal years from FY2004 to FY2014, it has managed to consistently pay a dividend in each year. In addition, the firm also has a knack for producing free cash flow.

But, moving on to the areas of concern, Singapore Press Holdings’ free cash flow has been in a sharp and continuous decline from FY2011 onward. Meanwhile, there’s been a lack of any margin of safety between the dividends paid and the free cash flow generated judging by how the former has been higher than the latter for the most part.

Furthermore, the company’s balance sheet has also been weak in recent years with debt coming in higher than cash.

In the first nine months of FY2015, Singapore Press Holdings had still depended on advertising on its various media platforms for 57.3% of its total revenue. This dependence also constitutes another source of risk for the firm’s future dividends.

Singapore Press Holdings newspaper total ad revenue change

Source: Singapore Press Holdings’ earnings presentations

As you can see in the chart just above, Singapore Press Holdings’ total advertising revenue in its newspapers has declined in every year since FY2011 (FY2015 has not ended yet, but the trend looks set to continue) after a brief recovery from the shellacking that was received in FY2009 partly as a result of the global financial crisis that was taking place at that time.

Competition from the emergence of online advertising platforms and news sources has caused some heartburn for Singapore Press Holdings in recent years. This has also contributed to a steady decline in the firm’s revenue from S$1.38 billion in FY2010 to just S$1.18 billion over the last 12 months.

It may not be a coincidence too to see that Singapore Press Holdings’ free cash flow started falling (in FY2011) near the time the firm’s ad revenue had suffered the same fate.

When we put together all that we’ve see with Singapore Press Holdings – namely the shrinking free cash flow, weak balance sheet, and declining ad revenue – it’d appear that the company has very little room for error in maintaining or growing its dividends in the future.

A Fool’s take

Singapore Press Holdings may not make for a good dividend stock as a result of the issues it’s facing despite carrying a high yield at the moment. But that said, it’s worth noting that this look at the company’s historical financials is not a holistic overview of the entire situation.

A deeper dive into the qualitative aspects of the company’s business as well as a careful contemplation of its odds for future growth (the company’s actually in the midst of a transformation of its business at the moment in order to remain relevant in the digital age) is also needed.

A study of Singapore Press Holdings’ financial track record can be important and informative, but more work needs to be done beyond this before any investing decision can be made.

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 doesn't own shares in any companies mentioned.