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Can High-Yielding Blue Chip SembCorp Marine Ltd Raise Its Dividends In 2015?

Oil-rig and vessels builder SembCorp Marine Ltd (SGX: S51) has a fantastic dividend yield at the moment.

Based on its current share price of S$1.665 and its dividend of S$0.13 per share in 2014, the blue chip stock (Sembcorp Marine is one of the 30 shares in the Straits Times Index (SGX: ^STI) and these 30 shares are often collectively referred to as blue chips) has a yield of 7.8%.

To put SembCorp Marine’s yield into perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of the Straits Times Index – has a yield of ‘just’ 3.4%.

But, investors who are tempted by the rig-builder’s attractive yield need to realise that the yield number is backwards looking. It’s more important to think about what the company’s dividends will look like in the years ahead.

SembCorp Marine has so far released financial results only for the first nine months of 2015. For that period, the firm has distributed an interim dividend of S$0.04 per share, down by 20% from the S$0.05 per share seen a year ago.

Let’s figure out the odds of SembCorp Marine raising – or at least maintaining – its annual dividends for the whole of 2015 from 2014 levels.

A lack of cash and a weak balance sheet

A glance at SembCorp Marine’s cash flow statement and balance sheet will point to the company facing difficulties in trying to bump up its dividends for the current year.

As investors, we have to note that dividends are ultimately paid by cash. And, SembCorp Marine’s cash flow statement shows that the firm hasn’t been able to bring in the cash thus far in 2015. In the first nine months of the year, the firm’s cash flow from operations clocked in at a negative S$408 million, a big decline from the –S$144 million that was observed a year ago.

Meanwhile, generally speaking, a company with a weak balance sheet that’s bloated with debt sees its dividends at risk of being reduced or removed entirely – due to either pressure from creditors or a simple lack of cash – even at the slightest slowdown in its business environment.

In SembCorp Marine’s case, its balance sheet has weakened drastically over the course of 2015. This can be seen in how the firm’s net-debt to equity ratio had ballooned from 21% at end-2014 to 64% at the third-quarter of 2015.

Lousy business prospects

Perhaps one of the strongest signs pointing to a slim annual dividend for SembCorp Marine in 2015 in relation to 2014 is a profit warning that the firm had announced at the start of this month. In the announcement, SembCorp Marine warned that it is “expected to record a net loss for the fourth quarter [of 2015].” The company pinned the blame on a “challenging operating environment and customers deferring or seeking to defer their rig orders.”

While nothing is set in stone yet with regard to the company’s annual dividend for the whole of 2015, it’s likely that the fourth-quarter loss – if it comes to pass – will severely hamper the firm’s ability to juice its dividends for the year. It’s also easy to imagine the potential loss weighing heavily on management’s mind.

A nail in the coffin

Given what we’ve seen above, a lower dividend for SembCorp Marine in 2015 seems likely. But, there may be even bigger problems for investors to think about: The firm’s accounts receivables have been ballooning.

Accounts receivable is a line item found in nearly every company’s balance sheet and it can be simply understood as sales which have been booked but which are yet to be collected. When accounts receivables start spiking while revenue growth is tepid or actually negative, it can be a sign of possible danger ahead.

The first three quarters of 2015 saw SembCorp Marine’s accounts receivables exhibit year-on-year growth of 46% (first-quarter), 101% (second-quarter), and 28% (third-quarter). Meanwhile, the firm’s revenue had actually declined by 2%, 10%, and 34% over the same period.

This phenomenon may point to SembCorp Marine’s inability or difficulty in collecting actual cash from its customers for services it has already rendered. When that’s combined with a balance sheet that’s becoming weaker (something I’ve already mentioned), it’s a risk that investors ought to sit up and watch.

A Fool’s take

In my opinion, the odds are skewed toward SembCorp Marine not being able to raise its dividends in 2015. Also, there are other troubling signs in the company’s financials – such as the growing accounts receivables – that investors may want to note.

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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.