3 Charts Investors Should See About the Dividends of Sembcorp Industries Limited

Sembcorp Industries Limited (SGX: U96), the utilities and marine conglomerate, had released its earnings for 2015 two weeks ago. In it, the company announced a final dividend of S$0.06 per share, which brought its total dividend for the year to S$0.11 per share.

At Sembcorp Industries’ current share price of S$2.89, the company thus has a trailing dividend yield of 3.8%. That may not seem overly high, but it’s worth pointing out that it’s slightly better than the 3.7% yield offered by the SPDR STI ETF (SGX: ES3) at the moment; the SPDR STI ETF is an exchange-traded fund which tracks Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI).

Given Sembcorp Industries’ status as a blue chip stock (it is part of the exclusive club of 30 stocks that make up the Straits Times Index) and its healthy dividend yield, it’s likely that the company’s a popular dividend stock for investors in Singapore.

Let’s take a look at three charts that I think can give investors some important insight into Sembcorp Industries’ dividend.

The first, Chart 1, shows the history of Sembcorp Industries’ dividends over the past decade from 2005 to 2015. Two important things to like are that the company has been able to consistently pay out a dividend over the timeframe we’re looking at and that those dividends have been steady (2006 contained a high special dividend of S$0.31 per share which skews the chart).

Chart 1 - Sembcorp Industries' total dividend (ordinary + special dividend) from 2005 to 2015
Source: S&P Global Market Intelligence (click chart for larger image)

Chart 2 illustrates Sembcorp Industries’ operating cash flow per share, free cash flow per share, and dividends per share over the same period as Chart 1. Dividends are ultimately paid with cash and a company can obtain that cash from a few sources. It can 1) take on more debt, 2) issue new shares, 3) sell its assets, and 4) generate cash from its daily business activities.

In general, the fourth option is the most sustainable and that’s why it’s important to watch a firm’s free cash flow. It is the actual cash flow from a company’s business activities that’s left after the firm has spent the necessary capital to maintain its businesses at their current states. The higher a company’s free cash flow can be in the future, the larger the potential for fatter dividends in the years ahead.

Chart 2 - Sembcorp Industries' total dividend, cash flow from operations, and free cash flow per share from 2005 to 2015
Source: S&P Global Market Intelligence; author’s calculation (click chart for larger image)

So, there are some troubling signs with Chart 2. First, Sembcorp Industries’ operating cash flow has fallen deep into negative territory in 2015. Second, it hasn’t been able to generate free cash fflow on a consistent basis over the past five years; in fact, the conglomerate has seen negative free cash flow in four out of the five years from 2011 to 2015. Third, Sembcorp Industries’ ability to generate free cash flow appears to have weakened significantly in recent years judging from the deep negative figures and the downward-slope of the metric seen in Chart 2.

Next, we have Chart 3, which showcases Sembcorp Industries’ net-debt (total debt minus cash) to equity ratio from 2005 to 2015:

Chart 3 - Sembcorp Industries' net-debt (total debt minus cash) to equity ratio from 2005 to 2015
Source: S&P Global Market Intelligence (click chart for larger image)

Dividends don’t come with guarantees. If a company’s balance sheet is weak as a result of high debt, it can easily choose to reduce or completely eliminate its dividends in order to protect its balance sheet when faced with a poor business environment.

Take BHP Billiton Limited for instance. According to my Australian colleague Tom Richardson, the Australia-listed mining giant had made a comment back in November 2015 that its priority would be its balance sheet, not its dividends, after a fall in commodity prices had hurt its business.

Based on BHP Billiton’s balance sheet figures as of 30 June 2015 (the latest available back then in November), it had a weak balance sheet with US$31.2 billion in total borrowings but just US$6.75 billion in cash and equivalents. Turns out, the company had announced its latest results last week and ended up slashing its dividends by nearly 75%.

So, Chart 3, much like Chart 2, throws up some concerns. As you can see, Sembcorp Industries’ balance sheet is at its weakest over the decade under study based on the net-debt to equity ratio (note: the higher the ratio, the more debt the company has). At the end of 2015, Sembcorp Industries’ net-debt to equity ratio stood at 65%.

It’s worth noting too that this comes at a time when Sembcorp Marine Ltd (SGX: S51) is facing deep strains on its business as a result of the collapse in the price of oil from over US$100 per barrel in mid-2014 to around US$35 today. Sembcorp Marine is in the business of building oil rigs and offshore marine vessels. It is also a big part of Sembcorp Industries’ business, accounting for 52% of the conglomerates’ total revenue in 2015.

A Fool’s take

Summing it all up, while Sembcorp Industries’ track record in paying a dividend is commendable, the company has had trouble producing cash flow from its business and its balance sheet is weak at the moment with a net-debt position.

I’m not trying to say here that Sembcorp Industries is necessarily a poor dividend stock. But, the current situation with the conglomerate’s cash flow and balance sheet are important risks investors may want to consider when looking at the company.

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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.