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The More Attractive Tourism Dividend Stock: Genting Singapore PLC vs. Straco Corporation Ltd

Tourists coming to Singapore will likely have visited, or at least heard of, popular attractions such as Resorts World Sentosa and the Singapore Flyer. It just so happens that the two landmarks are also currently key businesses for Genting Singapore PLC (SGX: G13) and Straco Corporation Ltd (SGX: S85), respectively.

So, it would be fair, in my opinion, to say that both companies belong to the same sector: Tourism. But, which of the two might be a better choice for investors who are interested in tourism-related dividend stocks?

To answer the question above, we can compare four key things: Dividend yields; dividend growth rates; balance sheet strength; and payout ratios.

Dividend yields

A stock’s yield can tell us how many bangs for our buck we’re getting in dividends when we invest in it. Here’s a simple illustration of how the numbers work: A stock with a yield of 4% will pay out S$40 in annual dividends if we have S$1,000 invested in it. From there, the logic follow that a higher yield will be of benefit to income investors.

On this count, Straco Corporation comes out tops – at its current price of S$0.85, it has a yield of 2.35% thanks to its dividend of S$0.02 per share in 2014. This compares with Genting Singapore’s yield of just 1.27% based on its dividend of S$0.01 per share in 2014 and stock price of S$0.79 at the moment.

Dividend growth

Current yields are important, but it cannot give us any information about something crucial – what a stock’s future dividend will look like. This is where the stock’s historical dividend growth comes into play – while the past is certainly not a perfect predictor of what lies ahead, it’s still useful as a base for building future expectations.

Chart 1 - Growth in total dividends (special + ordinary) for Genting Singapore and Straco

Source: S&P Capital IQ; author’s calculations

Straco charges ahead here. Singapore Flyer’s owner first paid out a dividend of S$0.0025 per share in 2006 and since then, that figure has jumped eight-fold to S$0.02 per share in 2014, as mentioned earlier. Genting Singapore’s dividend growth is lacklustre in comparison; the integrated resort outfit’s dividend was first initiated in 2011 and the payout has been kept at the same level of S$0.01 per share since.

Balance sheet strength

Dividends are not guaranteed. In other words, they can be cut when times are bad. This is why the strength of a company’s balance sheet is important.

When a company has a weak balance sheet that’s bloated with debt, its dividends run the risk of being reduced or removed completely – 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 has ample cash and relatively little borrowings – imbues a company with higher odds of protecting its dividends in the event of inevitable downturns in the business environment that happens every now and then.

Having a rock-solid balance sheet can even enable a firm to go on the offensive during tough times when its financially-shakier competitors are forced to batten down the hatches. This helps plant the seeds for potentially higher dividends in the future.

Genting Singapore and Straco balance sheet

Source: S&P Capital IQ; author’s calculations

The table just above shows that both Genting Singapore and Straco have strong balance sheets that are flush with cash. So, that’s a tie here.

Payout ratios

There are two types of payout ratios to note. One measures a stock’s dividend as a percentage of its earnings (we can call this the earnings payout ratio), while the other looks at a stock’s dividend as a percentage of its free cash flow (we can call this the cash flow payout ratio).

Both ratios can be useful indicators of the margin of safety that a stock has to maintain or grow its dividends in the future. There are no hard or fast rules as to what are considered ‘strong’ numbers, but the general rule of thumb is that the lower the ratios are, the more buffer there is for a company to absorb negative business developments.

Chart 2 - Payout ratios for Genting Singapore and Straco in 2014

Source: S&P Capital IQ

Genting Singapore gets the nod here ahead of Straco as it has lower earnings and cash flow payout ratios. It’s worth pointing out however, that Straco’s payout ratios of less than 50% can also be considered as healthy.

A Fool’s take

When all four of the key considerations are taken together, Straco’s the ultimate winner as it had beaten Genting Singapore in two of them with one of the considerations ending in a tie.

Notably, all that we’ve seen above shouldn’t be taken as the final word on the investing merits of the two aforementioned stocks. A deeper look into their competitive advantages and future business prospects will be required before any investing conclusion 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 Straco.