The Better Oil & Gas Dividend Stock: Keppel Corporation Limited vs. SembCorp Marine Ltd

When it comes to dividend-paying stocks, both Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) may be on the radar of income investors now by virtue of their market-beating yields.

Both companies also happen to be in very similar lines of business within the oil & gas industry. While Keppel Corp does have a sizeable real estate development arm, the company’s most important business (in terms of both revenue and profit) is still its Offshore & Marine segment, which builds oil rigs and repairs vessels. That is basically SembCorp Marine’s bread and butter too.

This sets up an interesting question: Which of the two might be the better oil & gas stock for dividends? To help arrive at an answer, we can compare some crucial aspects of both companies’ fundamentals: dividend yields; dividend growth rates; balance sheet strength; and payout ratios.

Dividend yields

The dividend yield of a stock tells us how much bang for our buck we’re getting in dividends if we invest in it. For instance, if a stock has a yield of 4%, we’d be getting S$40 in annual dividends if we have S$1,000 invested in it (Yield = Dividend / Stock Price). The logic thus follows that the higher the yield figure, the more it benefits an investor.

As I already mentioned, both Keppel Corp and SembCorp Marine have higher-than-average dividend yields. But, the former is a cut above the latter here.

Keppel Corp’s currently trading at S$6.75 and has a yield of 7.11% thanks to its annual dividend of S$0.48 per share in 2014. Meanwhile, the selfsame figures for SembCorp Marine are S$2.20, 5.91%, and S$0.13 per share respectively. The yields for both Keppel Corp and SembCorp Marine are significantly higher than the SPDR STI ETF’s (SGX: ES3) 3.3%.

(The SPDR STI ETF is an exchange-traded fund which mimics the fundamentals of the Straits Times Index (SGX: ^STI), Singapore’s market barometer.)

Dividend growth

While the yield figure is important, it can’t tell us much about what a stock’s dividend will look like in the future. For that, we can turn to a stock’s historical dividend growth for help. The past is not a perfect predictor of the future, but it is useful as a basis for forming future expectaions.

Growth in total dividends (special + ordinary) for Keppel Corp and SembCorp Marine

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

Keppel Corp comes out tops here. From 2004 to 2014, the company’s dividends have grown by a total of 528% 428%, outpacing SembCorp Marine’s 303% 203% jump.

Balance sheet strength

There are no guarantees when it comes to dividends. When a company has a weak balance sheet that’s bloated with debt, its dividends run the 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 better odds of protecting its dividends when the business environment suffers inevitable downturns every now and then.

Having a rock-solid balance sheet can even enable a company to mount an offensive during tough conditions when its financially-shakier competitors have to batten down the hatches. This helps plant the seeds for potentially higher dividends in the future.

Keppel Corp once again edges ahead of SembCorp Marine: The former’s latest net-debt (total debt minus cash & equivalents) to equity ratio of 52% is a fair bit lower than the latter’s 64%.

Payout ratios

There are two types of payout ratios that we’re interested in here. The first measures a stock’s dividend as a percentage of its earnings (we can call this the earnings payout ratio) while the second measures the dividend as a percentage of free cash flow (we can call this the cash flow payout ratio).

Both are useful indicators of the room for error that a stock has to sustain or raise its dividends in the future. Generally speaking, the lower the ratios are, the more margin of safety a company has to absorb negative developments.

Payout ratios for Keppel Corp and SembCorp Marine in 2014

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

When comparing the payout ratios of Keppel Corp and SembCorp Marine, it is the latter which finally gets the upper hand by virtue of its less negative cash flow payout ratio. It’s worth pointing out though that negative cash flow payout ratios are not a welcome sight in general as they allude to a company’s inability to generate cash from its business, which is not a healthy sign for a dividend stock.

A Fool’s take

Rounding up the scores, Keppel Corp emerges as the ultimate winner here with it claiming top honours in three of the four categories.

Notably, all that we’ve seen above shouldn’t be taken to be the final word on the investing merits of both Keppel Corp and SembCorp Marine. There are other important aspects of their businesses – such as the future of the oil & gas industry – that need to be considered 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.