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Battle of Mother Nature: The Better Blue Chip Agriculture Dividend Stock

Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), is made up of 30 stocks.

The group of 30, which are commonly known as the blue chips, consists of companies that are in many different types of sectors. One that is represented would be agriculture and there’s not just one, but two such companies, namely, Wilmar International Limited (SGX: F34) and Golden Agri-Resources Ltd (SGX: E5H).

Wilmar is involved mainly with the production of sugar and palm oil and its derivatives; the company also has smaller interests in other agricultural products like rice and soy, just to name a few. Meanwhile, Golden Agri is also in the business of palm oil and has its fingers across a wide spectrum of the industry’s value chain.

For income investors who are interested in the agricultural sector, which of the two companies might make for the better blue chip agriculture dividend stock? We can compare the following key things about their business fundamentals to help arrive at an answer: dividend yields; dividend growth rates; balance sheet strength; and payout ratios.

Dividend yields

The dividend yield figure tells us how much bang for our buck we’re getting in dividends form a stock. Here’s how the math works: A stock with a yield of 4% will deliver an annual dividend of S$40 per share if we have S$1,000 invested in it. The higher the yield number is, the fatter the payout is for investors.

On the basis of yields, Wilmar edges ahead of Golden Agri. At its current share price of S$2.94, Wilmar has a yield of 2.55% thanks to its dividend of S$0.075 per share in 2014. In contrast, Golden Agri’s dividend yield comes in at only 1.63% with its latest share price of S$0.36 and 2014 dividend of 0.585 Singapore cents per share.

Dividend growth

A stock’s yield has its importance, but it can’t tell us much about another crucial thing here: How its future dividends will look like. For that, we can turn to a stock’s historical dividend growth. While the past should never be taken to be a perfect indicator of what lies ahead, it is still useful as a guide for forming future expectations.

Growth in ordinary dividends for Wilmar and Golden Agri

Source: S&P Capital IQ

From 2006 to 2014 (there are no earlier records for Wilmar), Golden Agri’s dividends have climbed by a total of 30%. This pales in comparison to Wilmar’s 626% 526% spike in dividends.

Balance sheet strength

Commodity-related companies often take on large amounts of debt. But, there are no guarantees when it comes to dividends. When a company has a weak balance sheet that is stuffed full of 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.

In contrast, having a strong balance sheet gives a company a better chance of protecting its dividends when the business environment inevitably swings down from time to time.

There are more benefits that come with a strong balance sheet. During high-stress periods in the economy, a solid balance sheet can even enable a company to go on the offensive even as its financially-shakier competitors have to batten down the hatches. This helps plant the seeds for potentially higher dividends in the future.

In this area, Golden Agri manages to shine through with its latest net-debt (total borrowings minus total cash & equivalents) to equity ratio of 31%. The self-same figure for Wilmar is a much higher 95%.

Payout ratios

Payout ratios are useful indicators of how much room for error there is for a company to maintain or grow its dividends. There are two payout ratios we’re interested in here: The first measures a company’s dividend as a percentage of its profit (let’s call this the earnings payout ratio); the second replaces profit with free cash flow (let’s call this the cash flow payout ratio).

Generally speaking, the lower the ratios are, the more buffer there is for a company to absorb untoward business developments and still continue dishing out the dough.

Payout ratios for Wilmar and Golden Agri in 2014

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

On this count, Wilmar once again emerges as the stronger of the two. Golden Agri’s negative cash flow payout ratio deserves some mention – it tells us that the company had been unable to produce positive free cash flow in 2014 and that’s not an ideal scenario.

A Fool’s take

A quick roundup of the scores sees Wilmar winning the crown as it had bested Golden Agri in three of the four categories.

Notably, all that we’ve seen above shouldn’t be taken to be the final word when it comes to the investing merits of the two aforementioned stocks. A deeper look into other aspects of their businesses – such as the future of commodity prices – will be needed 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.