Comfortdelgro Corporation Ltd (SGX: C52) and Vicom Limited (SGX: V01) are both in a similar industry: Land transport. In fact, the former’s a majority-owner of the latter. But, for investors who are interested in transport-related dividend stocks, which of the two is better? For an answer, we can compare four important things: Dividend yields; dividend growth rates; balance sheet strength; as well as payout ratios. Dividend yields A stock’s yield tells us how much bang for our bucks we’re getting in dividends when we invest in it. For instance, a stock with a yield of 5% will deliver a S$50…
But, for investors who are interested in transport-related dividend stocks, which of the two is better? For an answer, we can compare four important things: Dividend yields; dividend growth rates; balance sheet strength; as well as payout ratios.
A stock’s yield tells us how much bang for our bucks we’re getting in dividends when we invest in it. For instance, a stock with a yield of 5% will deliver a S$50 annual dividend, if we have S$1,000 invested in it. Similarly, a stock with a yield of 1% will result in only S$10 in dividends for the same invested amount.
On the basis of yields, Vicom is a cut above Comfortdelgro. At its current share price of S$6.08, Vicom’s shares are carrying a historic yield of 4.4%, thanks to the firm’s annual total dividend of S$0.27 per share in 2014. Comfortdelgro, on the other hand, has a yield of just 2.7%, with its 2014 total dividend of S$0.0825 per share and share price of S$3.10 at the moment.
Dividend growth rates
Yields tell us our dividend returns for stocks at present – they tell us nothing about what a stock might pay out in the future. Looking at a stock’s historical growth in dividends can’t give us any certainty about what its payouts will look like in the years ahead, but it can still present us with some basis to build future expectations.
Source: S&P Capital IQ
What you can observe from the chart above is that Vicom has once again nudged ahead of Comfortdelgro. From 2004 to 2014, Vicom’s dividends have grown by 470% in total whereas Comfortdelgro has seen its dividends shrink.
Balance sheet strength
When a company has a weak balance sheet that’s bloated with debt, its dividends are at risk of being reduced or removed – either due to pressure from creditors or a simple lack of cash – even at the slightest hiccup in its business fortunes.
In contrast, a strong balance sheet – one that is flush with cash and with a low level of borrowings – gives a company a better chance of protecting its dividends during the inevitable tough times which comes along every now and then.
A solid balance sheet also enables a company to go on the offensive during a downturn. The firm can reinvest for growth when its financially-shakier competitors have to batten down their hatches; this helps plant the seeds for potentially higher dividends in the future.
Source: S&P Capital IQ
On this count, the table just above makes clear that Comfortdelgro loses out to Vicom.
There are two types of payout ratios: One measures a stock’s dividend as a percentage of its earnings (we can call this the earnings payout ratio) while the other replaces the stock’s earnings with its free cash flow (this can be known as the cash flow payout ratio).
Both ratios are useful indicators of how much room for error a stock has to maintain or grow its dividends in the future. There are no hard and fast rules as to what’s a ‘good’ number, but in general, the lower the ratio, the more buffer there is for a company to absorb untoward business developments.
Source: S&P Capital IQ
Comfortdelgro edges ahead of Vicom here by virtue of its lower earnings payout ratio. In 2014, Comfortdelgro had paid out 62.1% and 78.8% of its earnings and free cash flow, respectively, as dividends; the selfsame figures for Vicom over the same period are 79.4% and 73.3%.
A Fool’s take
In a final roundup, Vicom takes the cake with it besting Comfortdelgro in three of the four categories. It must be noted however that all that we’ve seen above shouldn’t be taken to be the final word on the investing merits of the two stocks. A deeper study regarding the qualitative aspects and future growth of their businesses will still be needed before any investing decision can be reached.
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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 Vicom.