A Better Palm-Oil Dividend Stock: First Resources Ltd vs. Bumitama Agri Ltd

Palm oil, according to the World Wildlife Fund, is the most widely consumed vegetable oil on the planet. It also has a wide variety of uses, being found in many items including lipstick, ice cream, detergent, biodiesel, instant noodles, and more.

Singapore’s stock market is home to a number of companies whose main business involves the production of this useful commodity. Among the larger ones in the group are First Resources Ltd (SGX: EB5) and Bumitama Agri Ltd (SGX: P8Z) with their billion-dollar market capitalisations.

Company Market capitalisation
First Resources S$3.14 billion
Bumitama Agri S$1.32 billion

Source: S&P Capital IQ

As of 30 September 2015, First Resources and Bumitama Agri have a total oil palm plantation size of 205,631 hectares and 158,257 hectares, respectively.

For investors who would like palm oil to be a source of power for their dividend-portfolio, which of the two companies might be the better choice? To answer, we can compare a few important aspects of their fundamentals, namely, their dividend yields, dividend growth rates, balance sheet strength, and payout ratios.

Dividend yields

The yield figure tells us how much bang for our buck we’re getting in dividends from a stock. For instance, a stock with a yield of 4% will be paying out S$40 in annual dividends if we have S$1,000 in it. As you can probably already tell, the higher the yield is, the larger the payout will be for investors.

On this count, Bumitama Agri comes out tops. At its current share price of S$0.74, it has a yield of 3.8% thanks to its 2014 dividend of S$0.028 per share. This compares with First Resources’ yield of just 1.8% at its latest share price of S$1.995 (and 2014 dividend of S$0.0355 per share).

Dividend growth

When looking at a stock for income, we should be thinking about its future growth in dividends. This is where the stock’s historical divided growth can be helpful. While the past is never a guarantee for what lies ahead, it’s still useful as a guide for setting future expectations.

First Resources and Bumitama Agri - growth in dividend

Source: S&P Capital IQ

This is where First Resources gets the nod ahead of Bumitama Agri. The latter was listed only in 2012 and first started a paying a dividend in 2013. The following year, 2014, saw Bumitama Agri’s dividend jump by 126%. That’s fantastic growth, but the track record is too short to be meaningful.

Meanwhile, First Resources’ dividend has grown by a total of 73% from US$0.0155 per share in 2009 to US$0.0268 in 2014.

Balance sheet strength

As investors, we must note that there are no guarantees with dividends. When a company has a weak balance sheet that’s bloated with debt, its dividends are at risk of being cut or removed completely – either due to pressure from creditors or a simple lack of cash – even if its business runs into the slightest of obstacles.

On the other hand, a strong balance sheet – one that is flush with cash and with little debt – gives a company higher odds of protecting its dividends during the inevitable times when the economic environment turns sour periodically.

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

Based on their latest finances as of 30 September 2015, First Resources and Bumitama Agri have net-debt (total debt minus total cash) to equity ratios of 43% and 76%, respectively. Given the lower number that First Resources has, it is the superior choice here.

Payout ratios

Payout ratios are useful indicators of the room for error that a company has to sustain or raise its dividends in the future.

There are two types of payout ratios that we are interested in. The first 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 number with free cash flow (let’s call this the cash flow payout ratio).

In general, the lower the payout ratios are, the more margin of safety there is for a company to absorb and withstand untoward business developments.

First Resources and Bumitama Agri - Payout ratios

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

Bumitama Agri has the better payout ratios if you’d look at the chart above. While Bumitama Agri’s earnings payout ratio of 39.9% is higher than First Resources’ 24.5%, the former has the stronger cash flow payout ratio by far (124.1% vs. 511.2%).

That said, Bumitama Agri’s 124.1% cash flow payout ratio is not the healthiest as it suggests that the company can’t bring in adequate free cash flow to cover its dividend payment.

A Fool’s take

In a roundup of the final scores, we have a tie here as both First Resources and Bumitama Agri have done well in two categories each.

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 – such as a consideration of their future prospects – will still 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.