3 Charts Investors Should See About the Dividends of Singapore Technologies Engineering Ltd

Home-grown engineering conglomerate Singapore Technologies Engineering Ltd (SGX: S63) has a healthy dividend yield. At its current share price of S$3.08, its yield stands at 4.9% thanks to its total annual dividend of S$0.15 per share in 2015.

That, combined with the company’s status as a blue chip stock – ST Engineering is one of the 30 companies that make up Singapore’s market bellwether, the Straits Times Index (SGX: ^STI) – likely makes the company a popular dividend play for investors in Singapore.

Let’s take a look at three charts which may give investors some crucial insight into the engineering firm’s dividend.

Starting with Chart 1, it plots the history of ST Engineering’s dividends from 2005 to 2015. There are two noteworthy things to like from it. First, over the decade under study, we can see that the conglomerate has had a track record of consistently paying an annual dividend. Second, while there’s no clear growth-trend in the dividend, those payouts have at least fallen within a reasonably tight range of S$0.1328 per share and $0.1688 per share.

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

The next chart, Chart 2, shows us ST Engineering’s cash flow from operations per share, free cash flow per share, and dividends per share for the same period as above. When it comes to dividends, a company’s free cash flow can be an important thing to look at.

Dividends are ultimately paid with cash and a company can obtain cash from a few sources. It can take on more debt, issue new shares, sell its assets, or simply generate cash from its daily business activities.

Generally speaking, the fourth option would be the most sustainable and that is where the free cash flow comes into play. Free cash flow measures the actual cash flow from a company’s business activities (also known as cash flow from operations) that’s left after the firm has spent the necessary capital needed 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 there is for fatter dividends ahead.

image (2)
Source: S&P Global Market Intelligence; author’s calculations (click chart for larger image)

ST Engineering had been able to consistently generate positive cash flow from operations and free cash flow from 2005 to 2015. But, the two important financial metrics have fallen hard since 2012. And crucially, ST Engineering’s dividend in 2015 was more than twice the firm’s free cash flow.

The last chart would show us an important aspect of ST Engineering’s balance sheet for the same periods as Chart 1 and Chart 2: The net-debt (total borrowings & capital leases minus cash & short-term investments) to equity ratio.

Guarantees don’t apply to dividends. When a company’s balance sheet is weakened as a result of heavy borrowings, the firm’s dividends run the risk of being reduced or removed entirely in the event that rough business conditions appear.

Such situations have happened before. In September 2015, the London-listed mining outfit Glencore PLC announced that it would undertake a number of actions – including the removal of its dividends – to shore up its debt-burdened balance sheet after a few years’ worth of declines in the prices of many commodities had pummeled its business.

Chart 3 - ST Engineering's net-debt (total debt minus cash & short-term investments) to equity ratio from 2005 to 2015
Source: S&P Global Market Intelligence (click chart for larger image)

Investors may be able to rest easy with ST Engineering on the balance sheet front. The company may not have the best balance sheet around given the slightly positive net-debt to equity ratio, but the number’s still at a very manageable 3%.

A Fool’s take

Putting it all together, while ST Engineering has an admirable track record in paying a dividend and a decent balance sheet, the conglomerate’s free cash flow has been falling over the past few years and currently falls short of the dividend. ST Engineering’s cash flow situation could thus be a source of risk that investors may want to consider when it comes to the firm’s ability to maintain or grow its dividends in the future.

There’s one last thing to note about the charts: They give important insights, but they shouldn’t be taken as the final word on the investing merits of ST Engineering. Deeper research is needed before any investing decision 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 doesn't own shares in any companies mentioned.