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Are Listed-Subsidiaries Better Dividend Stocks?

I’ve heard from some dividend investors that they prefer to invest in companies that are subsidiaries of other listed companies.

The logic behind their thinking is as follows: If a listed company is a subsidiary of another listed company, the latter would prefer the former to distribute most of its profit as a dividend. This is done so as to allow the parent company to allocate its subsidiary’s profit as it deems fit. The end result of this is that listed subsidiaries generate consistent dividends.

But, is the logic right? Do listed subsidiaries tend to distribute most of their profits as dividends and more important, do listed subsidiaries pay out dividends that are more consistent?

The child and the parent

The following’s not a comprehensive list, but it contains names of some listed companies which are subsidiaries of other listed companies in Singapore’s stock market:

  • SIA Engineering Company Ltd (SGX: S59), a subsidiary of Singapore Airlines Ltd (SGX: C6L)
  • Jardine Cycle & Carriage Ltd (SGX: C07) , a subsidiary of Jardine Strategic Holdings Limited (SGX: J37)
  • Vicom Limited (SGX: V01) , a subsidiary of ComfortDelgro Corporation Ltd (SGX: C52)
  • SembCorp Marine Ltd (SGX: S51) , a subsidiary of SembCorp Industries Limited (SGX: U96)
  • Great Eastern Holding Limited (SGX: G07) , a subsidiary of Oversea-Chinese Banking Corp Limited (SGX: O39)

So, how have these subsidiaries’ dividends looked like over the past 10 years?

1

Source: S&P Capital IQ

As you can see, all five companies have been paying a dividend in each year over the past decade and their dividends have also increased compared to the start of the time frame we’re looking at.

It is worth noting too that the subsidiaries had continued to pay out a dividend even during the Great Financial Crisis of 2008-09. So from my sample at least, it’d appear that listed subsidiaries do indeed manage to pay out dividends on a consistent basis.

But are the subsidiaries maintaining high payout ratios (dividends as a percentage of profit)?

2

Source: S&P Capital IQ

From their payout ratios over the past decade, we can see that the quintet had kept their numbers to less than 50% more often than not.

So, again from my limited sample, the listed subsidiaries do not necessarily pay out a large portion of their earnings to satisfy their parent companies. In fact, they do retain a significant amount of their earnings to reinvest in their own business.

Foolish Summary

Investors have to be careful of stereotyping certain types of companies in the market.

Although some investors might assume that listed subsidiaries tend to distribute most of their profits as dividends in order to satisfy their parent companies, we’ve seen from our sample (albeit a limited one) that this is not always true. This is a good example of how we should always investigate our assumptions before investing.

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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 Stanley Lim does not own shares in any of the companies mentioned above.