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Investors: Here’re Some Important Insights About SATS Ltd’s Dividends

Credit: Simon Cunningham

SATS Ltd (SGX: S58), a catering and ground-handling services provider, is a new blue chip stock in Singapore – it became one of the 30 constituents of Singapore’s market barometer, the Straits Times Index (SGX: ^STI), only recently on 21 September 2015.

It’s a blue chip with a decent dividend yield. At its current price of S$3.88, SATS has a yield of 3.6% thanks to its annual dividend of S$0.14 per share in its fiscal year ended 31 March 2015 (FY2015). This compares favourably with the yield of 3.4% that the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the Straits Times Index – carries at the moment.

Let’s have a look at two charts which can give us important insights about SATS’s dividend. The first chart illustrates the history of SATS’s annual dividends over the past decade:

Chart 1 - SATS's ordinary dividends per share

Source: S&P Capital IQ

One key takeaway here is SATS’s consistency in dishing out a dividend – the firm has not missed a single payout since FY2005. The stability in SATS’s dividend (the numbers have fluctuated between S$0.10 per share and S$0.14 per share for the most part for the period under study) is also noteworthy.

These traits could give investors some confidence in the firm’s ability to carry on dishing out the dough in the future.

But, there’s an important risk here and it’s encapsulated by the second chart, which shows us SATS’s payout ratios (dividends as a percentage of profit and dividends as a percentage of free cash flow) since FY2005:

Chart 2 -SATS's payout ratios

Source: S&P Capital IQ

Payout ratios can give us some indication of a company’s room for error in maintaining or raising its dividends in the future. In general, a lower payout ratio would correspond to more room for error.

In the case of SATS, its payout ratios have unfortunately been trending higher. In FY2005, SATS’s dividend was just 54.7% and 47.6% of its earnings and free cash flow, respectively. After a decade, the numbers in FY2015 came in at 79.8% and 89.2%. With its currently high payout ratios, SATS may not have much wriggle room to protect its dividends should there be any unexpected downturn in its business.

To sum up what we’ve seen, while SATS’s track record with its dividends is admirable, investors have to be aware that the firm does not have a thick cushion to absorb hiccups when it comes to sustaining or growing its dividend.

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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.