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Keppel Corporation Limited – Is Its Dividend Sustainable?

By now, we all know what the slump in oil prices have done to two of the world’s largest rig builders. Both these companies happen to be listed on the Singapore exchange too and they are Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51).

Some nice values

Over the course of 2015 so far, Keppel Corp and Sembcorp Marine have dropped by 30% and 49%, respectively. The big declines have given the shares attractive valuation numbers. For instance, at its current price of S$6.22, Keppel Corp’s dividend yield, based on 2014’s payout of S$0.48 per share, would stand at 7.7%.

The main point in this article would be to look at Keppel Corp and see if it can sustain its dividend. For this, we will be looking at three things: The company’s free cash flow; its debt levels; and its payout ratio.

As for SembCorp Marine, my colleague Chong Ser Jing had recently penned an article on the company’s dividend and it can be found here.

Free Cash Flow

The free cash flow number is calculated by deducting the money spent by a company on investment activities from its operating cash flow (OCF). Based on Keppel Corp’s results for the first nine months of 2015, the firm had operating cash flow which stood at a negative S$738 million. On top of that, it also had an outlay of S$46 million for investment activities.

While it is normal to see a company spend on investment activities as it shows that the firm is investing for the future, having negative operating cash flow is a potential worrying sign.

In Keppel Corp’s case, the main reason for its negative operating cash flow is its swelling accounts receivables.

A possible reason for the growing receivables is Keppel Corp’s customers holding back payments or not being able to make payments due to the tough business environment in the oil & gas space brought on by the downward spiral in the price of oil.

Debt levels

Keppel Corp’s net gearing has also shot up from 11% at the end of 2014 to 52% in the third-quarter of 2015. This is mainly due to the decrease in the company’s cash & deposit levels, which reduced from S$5.7 billion to S$1.7 billion. There was also an increase in borrowings, but it was negligible in the grand scheme of things.

The decrease in cash & deposits levels can be explained by Keppel Corp’s recent privatization of its real estate arm, Keppel Land, which happened in the first half of this year.

The payout ratio

Lastly, Keppel Corp has been fairly conservative when it comes to its dividend payout ratio. Based on the company’s website, it has paid around 50% of its net profit as dividends annually on a consistent bass. This is a fairly reasonable ratio. Another important thing to note will be that the company had  paid an interim dividend of S$0.12 per share in the first-half of 2015, unchanged from a year ago.

 A Fool’s take

It is not possible for investors to accurately predict if a company can continue paying out dividends at the same absolute value. Rather, all investors can do is to analyze a company’s financials to see if it still has the financial might to continue to do so.

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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 contributor Esjay does not own shares in any companies mentioned.