Battle of the High-Flyers: The Best Air Travel Dividend Stock

According to Airbus’ recent Global Market Forecast 2015-2034 report, global air traffic is predicted to grow at a compound annual rate of 4.6% over the next 20 years.

There are a number of companies in Singapore’s stock market that could potentially benefit from this trend. Some notable ones, by virtue of them having billion-dollar market capitalisations, include Singapore Airlines Ltd (SGX: C6L), SATS Ltd (SGX: S58), and SIA Engineering Company Ltd (SGX: S59).

SIA, SATS, and SIAEC market cap table

Source: S&P Capital IQ

The trio of stocks are all involved in different parts of the air travel industry. In the case of Singapore Airlines, its job is to ferry both passengers and cargo around the world. Meanwhile, we have SATS, which provides food catering services during flights and handles ground services in airports. And lastly, SIA Engineering’s bread and butter lies in the maintenance, repair, and overhaul (MRO) of aircraft.

For an investor who would like to derive some dividends from air travel stocks, which of the trio might be the best option? To answer that head-scratcher of a question, we can compare a few important aspects of the three stocks’ fundamentals: dividend yields; dividend growth rates; balance sheet strength; and payout ratios.

Dividend yields

A stock’s yield tells us how much bang for our buck we’re getting in dividends from it. The math behind is simple: If we’ve invested S$1,000 in a share that has a dividend yield of 3%, we’d be getting an annual dividend of S$30 from it. The logic follows that a higher yield will mean a fatter payout for income investors.

SIA, SATS, and SIAEC yield and price table (2)

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

From the table above (click for larger image), you can see that SIA Engineering is the best of the lot here as it has the highest yield.

Dividend growth

The yield number has its importance, as I had already mentioned, but there’s little it can tell us about what a stock’s dividend will look like in the future. For that, we can turn our attention to a stock’s historical dividend growth. While the past is not a perfect indicator of what lies ahead, it is still useful as a guideline for thinking about the future.

Growth in total dividends (ordianry + special) for Singapore Airlines, SATS, and SIA Engineering

Source: S&P Capital IQ

This is where SIA Engineering shines again. From the fiscal year ended 31 March 2005 (FY2005) to FY2015, the MRO outfit has seen its dividends jump by a total of 93%. For perspective, Singapore Airlines’ dividends had shrank over the years while SATS’ payout had grown by ‘only’ 55% in all.

Balance sheet strength

Dividends do not come with guarantees. When a company has a weak balance sheet that is stuffed with debt, its dividends run the risk of being reduced or removed entirely – either due to pressure from creditors or a simple lack of cash – even at the slightest hiccups in its business fortunes.

In contrast, a strong balance sheet – one that is flush with cash with little debt – gives a company a better chance of protecting its dividends in the event of inevitable downturns in the business environment which can happen every now and then.

Having a great balance sheet can even enable a firm to go on the offensive during tough climates when its financially-unsteady competitors have to batten down the hatches. This helps plant the seeds for potentially higher dividends in the future.

SIA, SATS, and SIAEC balance sheet table

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

In the case of our three air travel stocks, you can tell from the table above (click for larger image) that they all have rock-solid balance sheets that have more cash than debt. As a result, this criterion will be considered a tie.

Payout ratios

Payout ratios are useful indicators of how much room for error a company has to maintain or grow its dividends in the future. There are two types of payout ratios we’re interested in here: One measures a stock’s dividend as a percentage of its earnings (let’s call this the earnings payout ratio) while the other replaces the earnings with free cash flow (let’s call this the cash flow payout ratio).

In general, the lower the ratios are, the more buffer there is for a company to absorb untoward business developments.

Payout ratios for Singapore Airlines, SATS, and SIA Engineering in fiscal year ended 31 March 2015

Source: S&P Capital IQ

SATS comes out tops here. It does not have the best earnings payout ratio, but it does have the more solid cash flow payout ratio when compared to the other two companies. Regarding the latter, Singapore Airlines’ negative number indicates that it couldn’t generate free cash flow in FY2015 and that’s not ideal.

A Fool’s take

A quick tabulation of the scores show that SIA Engineering is our ultimate winner here as it has come out tops in two of the four categories.

It’s worth noting, however, that all we’ve seen above shouldn’t be taken to be the final word on the investing merits of Singapore Airlines, SATS, and SIA Engineering. More research needs to be done – such as on the future prospects of their businesses – before any investing decision can be made.

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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.