Public buses and trains are an everyday sight in Singapore. And when it comes to the companies running those services, there are really only two: SMRT Corporation Ltd (SGX: S53) and SBS Transit Ltd (SGX: S61). On the outset, the two companies may be like two peas in a pod given that they’re basically in the same lines of business, namely, public land transport. But, are they equals when it comes to their investing merits as dividend stocks? To bring us closer to an answer, there are some key things about their fundamentals that we can compare: dividend yields; dividend…
Public buses and trains are an everyday sight in Singapore. And when it comes to the companies running those services, there are really only two: SMRT Corporation Ltd (SGX: S53) and SBS Transit Ltd (SGX: S61).
On the outset, the two companies may be like two peas in a pod given that they’re basically in the same lines of business, namely, public land transport. But, are they equals when it comes to their investing merits as dividend stocks?
To bring us closer to an answer, there are some key things about their fundamentals that we can compare: dividend yields; dividend growth rates; balance sheet strength; and payout ratios.
The yield of a stock tells us how much bang for our buck we’re getting in dividends when we invest in it. As a simple illustration of how this might work, a stock with a dividend yield of 3% will be paying out S$30 in annual dividends if we’ve invested S$1,000 in it. From there, the logic flows that higher yields will be of benefit to income investors.
In comparing the dividend yields of our two land transport stocks here, SMRT comes out tops. At its current price of S$1.445, SMRT has a yield of 2.25% thanks to its dividend of S$0.0325 per share in its fiscal year ended 31 March 2015. Meanwhile, SBS Transit’s yield number clocks in at just 1.22% based on its latest share price of S$1.885 and dividend of S$0.023 per share in 2014.
Dividend growth rates
While the yield number is important, it cannot tell us much about what a stock may pay out in the future. For that, a study of a company’s historical dividend growth rates may help. The past is certainly not a perfect predictor of the future, but it can still be useful in helping us set up some guidelines for future expectations.
Source: S&P Capital IQ; author’s calculations
Both stocks have had a rather dismal history in this area as they’ve seen their payouts shrink over the past decade. But, we’re here to pick the relatively better performer and this is where SMRT has bested SBS Transit given that the former’s dividends have been reduced by a smaller amount.
Balance sheet strength
When a company’s balance sheet is weak due to heavy amounts of 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 hiccups in its business.
On the other hand, a strong balance sheet that is flush with cash gives a company a better chance of protecting its dividends in the inevitable downturns in the business environment which happens every now and then.
A healthy balance sheet may even enable a company to go on the offensive in tough climates when its financially-shakier competitors have to batten down the hatches. This plants the seeds for potentially higher dividends in the future.
With SMRT and SBS Transit’s latest net-debt (total debt minus cash & equivalents) to equity ratios of 81% and 157%, respectively, it is the former which pulls ahead. That said, it’s worth noting that both stocks have plenty of room for improvement here as those are some high net-debt to equity ratios that we’re seeing.
The payout ratio is a useful indicator in gauging a stock’s ability to sustain or raise its dividends in the future. There are two such ratios we can look at: One measures a stock’s dividend as a percentage of its earnings (we can call this the earnings payout ratio) while the other replaces earnings with free cash flow (we can call this the cash flow payout ratio).
There are no hard and fast rules for what can be considered as ‘good’ payout ratios. But in general, the lower the ratios are, the more room for error there is for a company to absorb untoward business developments and still maintain its dividends.
Source: S&P Capital IQ; author’s calculations
Between the two land transport stocks, SBS Transit is the one with the lower earnings payout ratio and less negative cash flow payout ratio. As a result, SBS Transit’s the winner here.
A Fool’s take
After a round up of the final scores, SMRT is the one which has ultimately triumphed as it had won top honours in three of the four categories.
But, it must be said that all we’ve seen above shouldn’t be taken to be the final word on the investing merits of the two land transport stocks. A further look into other areas of their businesses – such as their competitive advantages and future prospects – will 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 doesn't own shares in any companies mentioned.