This Stock Has A Great Yield Of 8.7%, But Are Its Dividends Safe?

Real estate, logistics, and financial services outfit Vibrant Group Ltd (SGX: BIP) has a dividend yield at the moment which fits its name. Thanks to its current share price of S$0.315 and its dividend of S$0.0275 per share for its fiscal year ended 30 April 2015 (fiscal 2015), the company has a great yield of 8.7%.

For perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI) – has a dividend yield of just 3.5% currently.

But, it’s worth noting that it can be dangerous to invest in a stock for dividends just because it has a yield that looks attractive and vibrant. That’s because the yield figure tells us nothing about what’s key here: A company’s ability to sustain or grow its payouts in the future.

So, what should investors make of Vibrant Group’s dividend? Let’s take a look at three charts which may give us important insight on the matter.

We’re starting with Chart 1 and it shows how Vibrant Group’s dividends have changed over the past decade from fiscal 2005 to fiscal 2015.

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

There’s one possible cause for worry here and that is the company’s inconsistency in paying a dividend. In fiscal 2009, Vibrant Group had eliminated its dividends and only resumed paying one in fiscal 2010. That said, the company has had a nice track record since, with its per-share payouts climbing steadily from S$0.0175 in fiscal 2010 to – as already mentioned – S$0.0275 in fiscal 2015.

Moving on to the second chart, we can observe Vibrant Group’s operating cash flow per share, free cash flow per share, and dividend per share over the same period as Chart 1.

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

When assessing a company’s dividend, free cash flow can be an important thing to look at. Dividends are ultimately paid using cash and a company can grab hold of cash from a few ways such as taking on 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. This is where free cash flow enters the scene. It is the actual cash flow generated by a company’s business activities (known as operating cash flow) that’s left after the firm has spent the necessary capital needed to maintain its businesses at their current states. The more free cash flow a company can produce in the future, the fatter its dividends can potentially be.

Chart 2 shows some worrying trends: Vibrant Group has failed to generate operating cash flow in a consistent manner over the timeframe under study, much less free cash flow.

The last chart we’re visiting is Chart 3 and it plots Vibrant Group’s net-debt to equity ratio (where net-debt refers to total borrowings and capital leases minus cash and short-term investments) over the last 10 years. In general, the higher the ratio, the weaker the balance sheet.

Chart 3 - Vibrant Group's net-debt to equity ratio from fiscal 2005 to fiscal 2015
Source: S&P Global Market Intelligence

Guarantees don’t come along with dividends. When a company has a weak balance sheet – one that is stuffed full of debt – it lowers the odds of the firm being able to protect its dividends. As you can see from Chart 3, Vibrant Group’s net-debt to equity ratio is now at 68%, the highest it’s been over the past decade. As such, the firm’s balance sheet does not appear to be in a good shape, in my view.

It may be worth knowing too that as of 31 January 2016, Vibrant Group’s net-debt to equity ratio had increased to 72%.

A Fool’s take

Rounding up all that we’ve seen about Vibrant Group above, there are a number of risks to the company’s dividend that investors may want to consider: (1) The firm’s spotty track record with paying a dividend; (2) its inability to consistently generate positive cash flows; and (3) its ballooning net-debt level.

All that being said, while this look at Vibrant Group’s financial history can be important, they shouldn’t be taken as the final word on the investing merits of the company. Deeper research needs to be done 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.