Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), is made up of 30 different companies. While these blue chips represent many diverse sectors, there are also a fair number of companies that can be said to be quite similar. One such pair would be Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) and SembCorp Marine Ltd (SGX: S51). A comparison between the two would certainly not be apples-to-apples, but they can still be loosely categorised grouped together as shipbuilders. So, for income investors who would like to stock up on some shipbuilding firms, which of the two would be the…
Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), is made up of 30 different companies.
While these blue chips represent many diverse sectors, there are also a fair number of companies that can be said to be quite similar.
One such pair would be Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) and SembCorp Marine Ltd (SGX: S51). A comparison between the two would certainly not be apples-to-apples, but they can still be loosely categorised grouped together as shipbuilders.
So, for income investors who would like to stock up on some shipbuilding firms, which of the two would be the better choice? For an answer, we can compare a few important aspects of the two companies’ fundamentals, namely, their dividend yields, dividend growth rates, balance sheet strength, and payout ratios.
The dividend yield figure gives us an idea of how much bang for our buck in dividends we’re getting from a stock. Here’s a simple illustration: A stock with a yield of 4% will be paying S$40 in annual dividends if we’ve S$1,000 invested in it. The higher the yield figure, the fatter the dividend-cheque investors can receive.
On the basis of yields, SembCorp Marine is superior. At its current price of S$2.15, SembCorp Marine is fetching a yield of 6.05% thanks to its dividend of S$0.13 per share in 2014. In contrast, Yangzijiang’s yield clocks in at only 4.85% with its latest share price of S$1.135 and 2014 dividend of S$0.055 per share.
Dividend growth rate
The past is not a perfect indicator of the future. But, it’s still useful in helping us set up some rough guidelines for what we can expect in the years ahead. That is why a look at a stock’s historical dividend growth is important – it could give us some perspective on what its future dividends may look like.
Source: S&P Capital IQ
Yangzijiang was listed only in 2007 and from then till 2014, its dividends have grown by a total of 247%. SembCorp Marine pales in comparison as it had seen its payouts climb by only 49% over the same period.
Balance sheet strength
Dividends do not come with any guarantees attached. When a company has a weak balance sheet that’s stuffed full 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 company with a strong balance sheet stands a better chance of protecting its dividends when the business environment inevitably turns south from time to time. That’s not all. A strong balance sheet can even enable a company to mount an offense in a weak economy 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, Yangzijiang once again comes out tops with its latest net-debt (total borrowings minus total cash & equivalents) to equity ratio of just 10%. The selfsame figure for SembCorp Marine is a much higher 64%.
Payout ratios can be useful indicators of how much room for error a company has to maintain or grow its dividends.
There are two payout ratios that we’re interested in. One measures a company’s dividend as a percentage of its earnings (let’s call this the earnings payout ratio) while the other replaces the earnings number 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 and still continue paying a dividend.
Source: S&P Capital IQ; author’s calculations
This is where Yangzijiang chalks up another victory over SembCorp Marine. As you can see from the chart just above, the former has low numbers for both payout ratios. The latter, meanwhile, has a negative cash flow payout ratio – this alludes to SembCorp Marine’s inability to generate free cash flow in 2014 and that’s not healthy.
A Fool’s take
In tallying the scores, Yangzijiang emerges as the ultimate winner as it has bested SembCorp Marine in three of the four categories.
All that being said, it must be noted that none of what you’ve seen above should be taken as the final word on the investing merits of the two aforementioned stocks. Deeper research is needed – 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.