A Better Supermarket Dividend Stock: Dairy Farm International Holdings Ltd vs. Sheng Siong Group Ltd

Grocery shopping is something most of us here in Singapore are very familiar with. It’s also something that can be used to build a thriving business.

In Singapore’s stock market, two companies that depend on running supermarkets for a living are Dairy Farm International Holdings Ltd (SGX: D01) and Sheng Siong Group Ltd (SGX: OV8).

The former is active across Asia and has business interests in diverse geographies including Hong Kong, mainland China, Singapore, Malaysia, and more.

As of 30 June 2015, Dairy Farm runs over 6,400 retail outlets consisting of supermarkets, hypermarkets, convenience stores, health & beauty chains, as well as home furnishing outlets. At the local front, the company has brands like Cold Storage and Guardian in its portfolio.

Coming to Sheng Siong, the company, which runs its namesake supermarkets, is much smaller than Dairy Farm in a number of aspects. To the point, Sheng Siong has 38 retail outlets under its umbrella (as of end-September 2015) and operates predominantly in Singapore.

For dividend investors who would like some income from supermarket companies, would Dairy Farm or Sheng Siong be the better choice? To help reach an answer, we can compare a few important aspects of the two companies’ business fundamentals, such as 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. As an example, a stock with a yield of 3% will be dishing out S$30 in dividends if we have S$1,000 invested in it. The higher the yield is, the more the payout will be.

On the basis of yields, Dairy Farm edges ahead of Sheng Siong. At its current share price of US$6.01, Dairy Farm has a yield of 3.8% thanks to its 2014 dividend of US$0.23 per share. The selfsame figures for Sheng Siong are S$0.84, 3.6%, and S$0.03 per share, respectively.

Dividend growth

The future will never be an exact replica of the past. But, history can still be useful in helping us guide our expectations for what lies ahead. When investing for income, it’s important that we think about a stock’s future growth in dividends and this is where the stock’s historical dividend growth comes into play.

Growth in ordinary dividends for Dairy Farm and Sheng Siong

Source: S&P Capital IQ

Dairy Farm has once again stepped ahead of Sheng Siong. The latter was listed only in 2011 and first started a paying a dividend in that year. Since then, Sheng Siong’s payouts have grown by a total of 69%. Dairy Farm, meanwhile, has seen its dividends jump by a total of 211% from 2004 to 2014.

Balance sheet strength

It’s worth noting that a company’s dividends do not come with any guarantees. When a firm has a weak balance sheet that’s bloated with debt, its dividends run the risk of being cut or removed entirely – either due to pressure from creditors or a simple lack of cash – even if its business runs into slight obstacles.

On the other hand, a strong balance sheet – one that has plenty of cash and little debt – gives a company a better chance of protecting its dividends during tough business environments which inevitably, and often unpredictably, appear every now and then.

A strong balance sheet also brings other benefits. If a company is unencumbered by leverage, it could mount an offense during rough 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.

This is an area where Sheng Siong comes out tops. Based on its latest finances as of 30 September 2015, the company had S$126 million in cash & equivalents and zero debt. In comparison, Dairy Farm had US$958.1 million in total borrowings but just US$369 million in cash & equivalents at the end of June 2015.

Payout ratios

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

There are two types of payout ratios that we’re looking at here. The first measures a stock’s dividends as its percentage of earnings (we can call this the earnings payout ratio) while the other uses the stock’s free cash flow in place of earnings (we can call this the cash flow payout ratio).

Generally speaking, a company would have a larger buffer to absorb untoward business developments if it has higher payout ratios.

Payout ratios for Dairy Farm and Sheng Siong in 2014

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

From the chart above, we can see that Dairy Farm has the better payout ratios as it 1) pays out a lower percentage of earnings as dividends when compared to Sheng Siong, and 2) managed to generate free cash flow in 2014, unlike Sheng Siong.

A Fool’s take

In a final tally of the scores, Dairy Farm is the ultimate winner here as it had bested Sheng Siong 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 companies. Further research into their businesses – such as their scope for future growth – is needed before any investing conclusion can be reached.

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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 owns shares in Dairy Farm International Holdings.