Challenger Technologies Limited Has A High Yield Of 5.8% Now – But Can It Sustain Its Dividends?

Electronic products retailer Challenger Technologies Limited (SGX: 573) is a stock that could attract income investors right now. At its current share price of S$0.46, the company has a high dividend yield of 5.8% thanks to its annual dividend of S$0.0265 per share in 2015.

For some perspective, the SPDR STI ETF (SGX: ES3) has a yield of only 3.6%. The SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI).

But, Challenger Technologies need not necessarily be a good stock for dividends just because it has a high yield. In fact, the yield figure tells us nothing about what’s important here: The company’s ability to sustain or grow its dividend in the future.

With this in mind, what should income investors make of Challenger Technologies? Let’s have a look at three charts that may be able to give us some useful insight on the company’s dividend.

Chart 1 is the first chart we’re going to study and it plots Challenger Technologies’ dividend over the past decade from 2005 to 2015:

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Source: S&P Global Market Intelligence

There are a number of things to like about Chart 1. First, Challenger Technologies has been able to pay an annual dividend consistently in the decade under study; that could be a sign of the resilience of the firm’s business. Second, the retailer’s dividend has also displayed a clear upward trend, rising from S$0.016 per share in 2005 to, as mentioned earlier, S$0.0265 in 2015.

We can move on to the next chart, seen immediately below, which illustrates Challenger Technologies’ operating cash flow per share, free cash flow per share, and dividend per share for the same timeframe as Chart 1.

image (7)
Source: S&P Global Market Intelligence

Before touching on Chart 2, it’s important to share a few words about the significance of the financial metrics that are plotted. Dividends are ultimately paid with cash and a company can get hold of cash via a few ways such as taking on debt, issuing new shares, selling assets, and generating cash from its daily business activities.

In general, the last option is the most sustainable choice for a company. That is where free cash flow enters the scene. It measures the cash flow generated by a company’s business (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 higher a company’s free cash flow can be in the years ahead, the fatter its dividend can potentially be.

Coming back to Chart 2, Challenger Technologies has had a good record of producing free cash flow. There was only one year (2009) when the number was negative. But, the company’s performance in 2015 is a little worrying – as the chart illustrates, both operating cash flow and free cash flow had dropped. In that year, the company’s dividend was nearly five times that of its free cash flow.

The last chart I’m interested in is Chart 3, and it shows the company’s cash and debt levels from 2005 to 2015.

image (8)
Source: S&P Global Market Intelligence

It’s worth noting that dividends don’t come with guarantees. A strong balance sheet – one that has lots of cash and little debt – gives a company better odds of being able to protect its dividends even in trying business environments. A weak balance sheet – one that is stuffed full of debt – lowers those odds.

As you can observe from Chart 3, Challenger Technologies’ balance sheet is in great shape at the moment with S$42 million in cash and zero debt. The company has also spent the past decade with a strong balance sheet that either had no or minimal debt.

A Fool’s take

To sum up what we’ve seen, Challenger Technologies has a great balance sheet and a good track record of generating free cash flow and growing its dividends. These traits suggest that the company has some nice room for error when it comes to sustaining or raising its dividends in the years ahead. But, there’s also an important risk: The company’s operating cash flow and free cash flow had plummeted in 2015. That could be a headache if it becomes a prolonged trend.

All that being said, it’s worth pointing out that everything you’ve seen here about Challenger Technologies should not be taken as the final word on its investing merits. It’s meant to be a useful starting point for further research.

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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.