The Stronger Healthcare Dividend Stock: Raffles Medical Group Ltd vs. IHH Healthcare Bhd

According to the United Nations’ 2015 revision of its World Population Prospects report, Asia’s population is projected to grow by nearly 20% from 4.39 billion in 2015 to 5.27 billion in 2050.

Meanwhile, the percentage of the elderly (those aged 60 and above) in Asia is also expected to increase from 12% in 2015 to 25% by 2050.

This trend of a growing and aging population in Asia could possibly serve as a tailwind for companies that are running hospitals, or just providing healthcare services in general in the continent.

In Singapore, two higher-profile companies in that space – by virtue of their billion-dollar market capitalisations – are Raffles Medical Group Ltd (SGX: R01) and IHH Healthcare Bhd (SGX: Q0F).

Company Market capitalisation (30 Nov 2015)
Raffles Medical S$2.41 billion
IHH Healthcare RM52.1 billion

Source: S&P Capital IQ

Raffles Medical runs its flagship Raffles Hospital in Singapore, along with a network of around 100 medical centres here. Beyond that, the firm is developing a 400-bed international hospital in Shanghai, China, and also has medical centres and clinics in other Asian regions like Hong Kong and Japan.

As for IHH Healthcare, its business mainly consists of its stakes in 39 hospitals across 10 countries. In 2014, Singapore, Malaysia, and China had accounted for 61% of its total revenue.

For investors who are interested in some dividend income from healthcare-related stocks, which of the two might be a better choice? To arrive at an answer, we could compare some important aspects of their business fundamentals, namely, their dividend yields, dividend growth rates, balance sheet strength, and payout ratios.

Dividend yields

The yield figure gives us an idea of how much bang for our buck we’re getting in dividends from a stock. Here’s a simple illustration: A stock with a yield of 3% will pay out S$30 in annual dividends if we have S$1,000 invested in it. To state the obvious, the higher the yield is, the more dividends investors can receive.

On the basis of yields, Raffles Medical is the superior choice. At its current price of S$4.19, it has a yield of 1.3% thanks to its dividend of S$0.055 per share in 2014. In contrast, IHH Healthcare has a yield of just 0.5%; the company’s latest share price is S$2.09 and it had paid a dividend of RM0.03 per share (roughly S$0.0114) in 2014.

Dividend growth

The past is certainly not a perfect indicator of the future, but it still has its usefulness in being a guideline for setting expectations about what lies ahead. This is why it can be important to look at a stock’s historical dividend growth.

Raffles Medical and IHH Healthcare dividend growth

Source: S&P Capital IQ

IHH Healthcare, which was listed only in 2012, first started paying a dividend in 2013. In 2014, its payout had actually jumped by 50%. That rate of growth is healthy, but that track record is too short to be meaningful.

Raffles Medical on the other hand, had been paying dividends consistently over the past decade, with the figure growing by 242% in total from 2004 to 2014. As such, Raffles Medical is the one that comes out tops here.

Balance sheet strength

If there’s one thing we must know about dividends, it is that no guarantees are involved. When a company has a weak balance sheet that’s bloated with debt, its dividends are at 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.

On the other hand, a strong balance sheet – one that is flush with cash with little debt – gives a company higher odds of protecting its dividends in the inevitable downturns in the business environment which would occur from time to time.

A strong balance sheet can bring other benefits. Without the shackles of leverage, a company can even mount an offense in tough economic environments even when its financially-weaker competitors have to batten down the hatches. This helps plant the seeds for potentially higher dividends in the future.

On this count, Raffles Medical once again triumphs over IHH Healthcare. As of 30 September 2015, Raffles Medical had more cash than debt (S$89.5 million vs. S$8 million) whereas it’s the opposite for IHH Healthcare (RM2.10 billion in cash vs. RM6.12 billion in borrowings).

Payout ratios

Payout ratios can be useful indicators for the room for error that a company has to maintain or grow its dividends in the future.

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 (let’s call this the earnings payout ratio) while the other measures the dividend as a percentage of free cash flow (let’s call this the cash flow payout ratio).

Generally speaking, the lower the payout ratios are, the more buffer there is for a company to absorb untoward business developments.

Raffles Medical and IHH Healthcare payout ratios

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

This is where IHH Healthcare has finally gained the upper hand. As you can see from the chart above, the pan-Asian hospital operator has lower payout ratios (of both the earnings and cash flow variety) than Raffles Medical.

It’s worth pointing out though, that Raffles Medical’s payout ratios of less than 50% are still strong.

A Fool’s take

In a final tally of the scores, Raffles Medical emerges as the ultimate winner given that it had bested IHH Healthcare in three of the four categories.

Notably, all that we’ve seen above shouldn’t be taken as the final word on the investing merits of the two aforementioned stocks. A deeper look into their businesses will still be required before any investing decision can be reached.

For more insights on dividend investing and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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 owns shares in Raffles Medical Group.