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3 Key Charts Investors Must See About The Dividends Of Keppel Corporation Limited

Keppel Corporation Limited (SGX: BN4) is a big company in Singapore’s stock market. At its current stock price of S$4.94, it has a market capitalisation of S$8.9 billion.

But, that’s not the only hefty thing about Keppel Corp – the company, which is mainly involved with the building of rigs and the development of properties, has a fat dividend yield too. Thanks to its annual dividend of S$0.34 per share in 2015, Keppel Corp’s yield is at 6.9% currently.

For some perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has a yield of only around 4% at the moment.

Let’s take a look at three charts which can give us depper insight into Keppel Corp’s dividend.

The first chart shown below gives us a history of Keppel Corp’s ordinary dividend since 2005:

Chart 1 - Keppel Corp's ordinary dividends since 2005
Source: S&P Capital IQ

What stands out for me about Chart 1 is the unmistakable climb in the company’s dividend over the period we’re looking at. That said, there has also been a sharp dip in the firm’s pay-out in 2015 (from S$0.48 to S$0.34) and that’s something to watch.

The second chart illustrates Keppel Corp’s free cash flow over the same period as Chart 1:

Chart 2 - Keppel Corp's free cash flow per share since 2005
Source: S&P Capital IQ

Dividends are ultimately paid using cash and a company can obtain its cash from a few sources. A company can (1) take on debt, (2) issue new shares, (3) sell assets, and (4) generate cash from its business activities.

There are always exceptions, but it’s generally more sustainable for a company to be paying dividends with the cash it has generated from its business. This is why it’s important to keep a close watch on a firm’s free cash flow.

Free cash flow is the actual cash flow from operations that’s left after the firm has spent the necessary capital needed to maintain its businesses at their current state. The higher a company’s free cash flow can be in the future, the greater the potential there is for growing dividends.

What we can observe in Chart 2 is troubling – Keppel Corp hasn’t been able to generate positive free cash flow for a number of years now and the situation only seems to be worsening. This seriously erodes the margin of safety that the firm has in maintaining or growing its payouts in the future.

This brings me to something important about dividends that investors need to note: There are no guarantees when it comes to a company paying dividends. When a firm has a weak balance sheet that’s bloated with debt, its dividends run the risk of being reduced or removed – either due to pressure from creditors or a simple lack of cash – even at the slightest hiccup in its business.

Chart 3 below gives us some clues on the strength of Keppel Corp’s balance sheet; it shows changes to the company’s net debt (total borrowings minus cash and short-term investments) over equity ratio since 2005:

Chart 3 - Keppel Corp's net debt to equity ratio
Source: S&P Capital IQ

There are worrisome signs here as well. As you can observe, the rig-builder and property developer’s net debt to equity ratio is currently at the highest it has been over the decade ended 2015.

A Fool’s take

From what we’ve seen, Keppel Corp has had a commendable long-term history of dividend increases. But, for investors who are attracted to the firm’s yield and dividend track record, there are important risks to note regarding the troubling lack of free cash flow and the severe weakening of the balance sheet.

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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.