This Stock Has A High Yield Of 6%, But Are Its Dividends Safe?

Electronics manufacturing services provider Venture Corporation Ltd (SGX: V03) is one of the stocks in Singapore with a solid dividend yield at the moment. At its current share price of S$8.18, it has a yield of 6.1% thanks to its annual dividend of S$0.50 per share for 2015.

While that yield does look attractive, it’s worth noting that it can be dangerous to invest in a company’s shares just because it has a high historical yield. Offshore support vessels builder Nam Cheong Ltd (SGX: N4E) is a great example. The company had eliminated its dividend for 2015 completely when it announced its results for that year on 25 February 2016. But just the day before, the company’s shares had carried a huge 15% historical yield based on its annual dividend for 2014.

Coming back to Venture Corp, what should investors make of its dividend? Let’s take a look at three charts which may give us some important insight about the company’s payouts.

Chart 1’s the first chart we’re starting with and it illustrates the history of Venture Corp’s total dividend (ordinary dividend plus special dividend) from 2005 to 2015.

Chart 1 - Venture Corp's total dividend (ordinary + special dividend) from 2005 to 2015
Source: S&P Global Market Intelligence

There are two things to like about Venture Corp from Chart 1. First, the company has managed to consistently pay a dividend over the past decade. Second, while a trend of growing dividends would have been preferred, Venture Corp has still managed to keep its dividends in a remarkably tight range of between S$0.50 per share and S$0.58 per share from 2005 to 2015.

Next, let’s look at Chart 2, which shows Venture Corp’s operating cash flow per share, free cash flow per share, and dividend per share for the same period as Chart 1.

Chart 2 - Venture Corp's total dividend, operating cash flow, and free cash flow per share from 2005 to 2015
Source: S&P Global Market Intelligence

When it comes to the study of dividends, a company’s free cash flow can be an important thing to look at. Dividends are ultimately paid using cash and a company can get hold of cash from a few ways such as taking on debt, issuing new shares, selling assets, or generating cash from its daily business activities.

Each source of cash may be suitable depending on the circumstances, but generally, the last option is the most sustainable choice. This is where free cash flow comes into play. It measures the actual cash flow generated by a company’s business activities (also known as operating cash flow) that’s left after the firm has spent the necessary amounts needed to maintain its businesses at their current states. The more free cash flow that a company can produce in the future, the higher its dividends can potentially be.

As you can see from Chart 2, Venture Corp’s operating cash flow – while consistently positive – had exhibited wild swings. This has affected the firm’s free cash flow as well, causing the metric, in some years, to come in lower than the dividends seen. The bright spot here is that there’s currently a comfortable margin of safety in place – Venture Corp’s dividend for 2015 is just 63% of its free cash flow for the year.

The last chart we’re interested in is Chart 3, which shows an important aspect of Venture Corp’s balance sheet over the past decade: Its cash and debt levels.

Chart 3 - Venture Corp's cash & equivalents and total debt levels from 2005 to 2015
Source: S&P Global Market Intelligence

Dividends don’t come with guarantees. A strong balance sheet – one that is flush with cash with little debt – gives a company higher odds of protecting its dividend when it runs into a challenging business environment. On the other hand, a weak balance sheet – one that’s weighed down by heaps of debt – lowers the odds.

What Chart 3 shows is comforting. Venture Corp has a strong balance sheet at the moment with its cash hoard heavily outweighing its borrowings.

A Fool’s take

To sum up what we’ve seen, there are a number of things to like about Venture Corp: It has a good track record of paying consistent dividends; its free cash flow currently covers it dividend comfortably; and it has a solid balance sheet.

But, do note that all that you’ve seen above shouldn’t be taken as the final word on the investing merits of Venture Corp. They are important and insightful, but deeper research needs to be done before any investing decision can be made on 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.