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Can This Stock With A 4.7% Yield Sustain Its Dividends?

At its current stock price of S$0.215, Raffles Education Corp Ltd (SGX: NR7) has a yield of 4.7% thanks to its dividend of S$0.01 per share in fiscal 2015 (year ended 30 June 2015).

That’s a market-beating yield, considering that the SPDR STI ETF (SGX: ES3) – an exchange-traded fund that tracks the fundamentals of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI) – has a yield of ‘just’ 3.6%.

But for any investor enticed by Raffles Education’s yield, it’s worth considering if the company has the ability to maintain or grow its dividends in the future. Here are three charts about Raffles Education that could shed some light on the matter.

The first chart I’m interested in is Chart 1 and it plots Raffles Education’s dividends over the past decade. There are some worrying signs. First, the company has skipped paying a dividend in some years. Second, there’s no clear pattern of growth in the payouts.

Chart 1 - Raffles Education's ordinary dividend per share from fiscal 2005 to fiscal 2015
Source: S&P Global Market Intelligence

Chart 2 is up next and it illustrates Raffles Education’s operating cash flow per share, free cash flow per share, and dividend per share from fiscal 2005 to fiscal 2015.

A company ultimately pays its dividends with cash. That cash can come from a few sources, namely, the company taking on more debt, issuing new shares, selling assets, or simply generating cash from its daily business activities.

The last option is generally the most sustainable choice and this is where free cash flow enters the picture. Free cash flow measures the cash a company generates from its businesses (what’s known as operating cash flow) after the necessary capital has been spent to maintain its businesses at their current state. The higher a company’s free cash flow can be in the future, the fatter its dividends can possibly be.

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

There are again some reasons for worry. For instance, Raffles Education has had trouble generating positive free cash flow in recent years. Moreover, the company’s operating cash flow (the raw fuel for free cash flow) has also dwindled.

We’re down to the last chart and that’s Chart 3. It shows how Raffles Education’s net-debt position (total borrowings and capital leases net of cash and short-term investments) has changed over the same period as in Charts 1 and 2.

Chart 3 - Raffles Education's net-debt position from fiscal 2005 to fiscal 2015
Source: S&P Global Market Intelligence

A company’s balance sheet is an important factor to look at when it comes to dividends. A company with a weak balance sheet – one that’s loaded with debt – is at higher risk of having to reduce or eliminate its dividends in a weak business environment as compared to one with a strong balance sheet.

Raffles Education’s balance sheet can’t be called strong. As of 30 June 2015, the company had a net debt position of S$304 million, the highest the figure has been in the timeframe under study.

A Fool’s take

In sum, Raffles Education has had a spotty track record with paying a dividend as well as generating cash flow from its business. Its balance sheet also looks weak with a large net-debt position.

These are risks that could prevent the company from sustaining or raising its dividends in the future. That said, what we’ve seen from the three charts above – as important as they are – should not be taken as the final word on the company’s investing merits. A deeper study is required before any investing conclusion 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 doesn't own shares in any companies mentioned.