Can Vicom Ltd Keep Up After 7 Consecutive Years Of Dividend Growth?

It’s rare to find companies in Singapore’s stock market that can string together a long run of dividend increases in consecutive years. One such company is the inspection and testing outfit Vicom Ltd (SGX: V01).

Vicom's dividend table
Source: S&P Global Market Intelligence and company’s earnings

As the table above shows, Vicom has hiked its annual dividend for seven consecutive years. With such a track record, it may be natural for investors to wonder if the company can keep it up in 2016 and beyond. Let’s take a look at two charts which may give us important insights into the firm’s dividend.

Chart 1 is the first chart we’re looking at and it illustrates Vicom’s operating cash flow per share, free cash flow per share, and total dividend per share from 2008 to 2015. A company’s cash flow numbers can be an important thing to focus on when it comes to dividends.

Cash is ultimately used to pay dividends and a company can obtain cash in a number of ways, such as taking on more debt, issuing new shares, selling assets, or simply generating cash from its daily business activities.

There are always exceptions, but in general, the last option is the most sustainable choice for a company. That’s where free cash flow comes into play. Free cash flow measures the actual cash that a company produces from its business activities (also known as operating cash flow) that’s left after the firm has spent the capital needed to maintain its businesses at their current states. The more free cash flow a company can pump out from its business in the future, the higher its dividends can potentially be.

Chart 1 - Vicom's total dividend, operating cash flow, and free cash flow per share from 2008 to 2015
Source: S&P Global Market Intelligence and company’s earnings

What Chart 1 shows is promising. Vicom’s operating cash flow and free cash flow have both grown steadily over the timeframe under study. Moreover, there’s a comfortable gap between the firm’s free cash flow and dividend, which gives a margin of safety. That said, there are also some areas of concern.

First, the margin of safety has been shrinking in recent years. To the point, Vicom’s total dividend was just 62% of its free cash flow in 2011; this ratio has expanded to 77% in 2015. Second, Vicom’s operating cash flow had also dipped slightly in 2015 (from S$37.8 million in 2014 to S$36.4 million). Operating cash flow is the fuel for free cash flow and if there’s a prolonged decline in this area, then Vicom’s future free cash flows may be under threat.

The next chart I’m interested in is Chart 2, which shows Vicom’s cash and debt levels on its balance sheet for the same period as Chart 1.

A study of a company’s balance sheet can also be important when it comes to assessing how its future dividends might change. A strong balance sheet – one that is flush with cash with little debt – gives a company higher odds of protecting its dividends when it has to contend with a weak business environment. On the other hand, a weak balance sheet – one that’s saddled with lots of borrowings – lowers those odds.

London-listed mining outfit Glencore PLC is a good example of the risks that can come with a shaky balance sheet. In September 2015, the company announced that it would be enacting some drastic measures – including the complete elimination of its dividend – in order to protect its debt-laden balance sheet. That came after falling commodity prices had hurt the firm’s business badly.

Chart 2 - Vicom's cash & equivalents and total debt levels from 2008 to 2015
Source: S&P Global Market Intelligence

Chart 2 gives us a good idea of how strong Vicom’s balance sheet is. From 2008 to 2015, the firm has had zero debt. In addition, the cash level had nearly quadrupled from S$27 million to S$100 million. This growing cash pile could come in handy should Vicom’s business slowdown temporarily, a situation which has a fair chance of occurring given the company’s latest results.

For the whole of 2015, Vicom’s profit had stepped up by 4.2%, but its revenue had dipped by 1.3%. Its outlook also appeared dim, with it commenting that demand for its services are expected to fall.

A Fool’s take

Vicom’s prodigious ability to generate free cash flow and its rock-solid balance sheet portend well for its future dividends. But, there are also some important risks to note, such as the likely slowdown in its business environment and the shrinking gap it has between its free cash flow and dividends.

Although all that you’ve seen above about Vicom can be important and insightful, do note that they shouldn’t be taken as the final word on the investing merits of the company. More research needs to be done 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 owns shares in Vicom.