After 7 Years Of Consecutive Dividend Growth, Can Comfortdelgro Corporation Ltd Keep It Up?

Comfortdelgro Corporation Ltd (SGX: C52) is likely to be a company that many investors in Singapore are familiar with. Not only does the company have a big market capitalisation of S$6.47 billion at its current share price of S$3.00, its line of business – the provision of public transport services – is also something that many people in the island nation come across daily.

But, there’s something which not many investors may realise about the company: It has had a track record of seven years of consecutive growth in its annual dividend. Just check out the table below:

Comfortdelgro Dividend per share table (2)
Source: S&P Global Market Intelligence

Given this track record, I think it may be natural for investors to ask: What’s next? Can Comfortdelgro keep this up? Let’s take a look at two charts which may give us crucial insight into the company’s dividend.

The first chart, Chart 1, shows the history of Comfortdelgro’s cash flow from operations per share, free cash flow per share, and dividends per share from 2008 to 2015. When it comes to a company’s dividend, the free cash flow number can be important to consider.

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

In general, the last option is the most sustainable choice and that’s why free cash flow is worth keeping an eye on. 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 it needs to maintain its businesses at their current states. The higher a company’s free cash flow can be in the future, the fatter its dividends can potentially be.

Chart 1 - Comfortdelgro's total dividend, cash flow from operations, and free cash flow per share from 2008 to 2015
Source: S&P Global Market Intelligence

So what Chart 1 shows is a little worrying. Over the period under study, the company’s cash flow from operations has remained more or less flat. But when coupled with an increase in capital expenditures, the firm’s free cash flow has declined over the years and actually fell into negative territory in 2015, the first time it has happened in the timeframe we’re looking at. What this also means is that Comfortdelgro’s free cash flow is currently insufficient to cover its dividends.

Chart 2 is the second chart I’m interested in and it illustrates Comfortdelgro’s net-debt (total borrowings & capital leases minus cash & short-term investments) to equity ratio.

Chart 2 - Comfortdelgro's net-debt (total debt minus cash & short-term investments) to equity ratio from 2008 to 2015
Source: S&P Global Market Intelligence

It’s worth noting that guarantees don’t come with dividends. If a company has a weak balance sheet that is bloated with debt at a time when it is confronted with a poor business environment, the company can reduce or eliminate its dividends in order to protect its balance sheet.

Australian mining outfit BHP Billiton Limited is a good example. Back in November 2015, after falling commodity prices had trampled its business, the company had commented publicly that its priority would be its balance sheet and not its dividends.

According to BHP Billiton’s financial figures as of 30 June 2015 (the latest available back then in November 2015), it had a shaky balance sheet with US$31.2 billion in total debt and just US$6.75 billion in cash and equivalents. In the company’s latest earnings release on February 2016, it ended up slashing its dividend by nearly 75%.

Coming back to Chart 2 and Comfortdelgro, there’s some source for comfort. The company’s balance sheet looks strong to me at the end of 2015 given its negative net-debt to equity ratio (a negative net-debt to equity ratio would mean that the company has more cash than debt).

A Fool’s take

Based on what we’ve observed from Comfordelgro’s dividend track record and Charts 1 and 2, the firm has a good balance sheet and an admirable history of dividend growth. But, it has displayed falling (and now negative) free cash flow  – this point could be a source of risk investors may want to think about when it comes to the land transport outfit’s ability to sustain or raise its dividends in the future.

That said, it’s worth pointing out that while all that we’ve seen with Comfortdelgro above can be important and insightful, they shouldn’t be taken as the final word on the investing merits of the company. Further research is required before any investing decision can be made.

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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.