In Singapore’s list of blue chip stocks, Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) can be said to be pretty similar. Both are in the business of building oil rigs and other types of vessels that are used in the oil & gas industry. Keppel Corp’s more diversified than Sembcorp Marine as it has a sizeable property arm, but its Offshore & Marine segment still makes up the majority of its revenue. Given this, investors may look at the two companies and think: Which of the two is the stronger oil & gas dividend stock right now?…
Both are in the business of building oil rigs and other types of vessels that are used in the oil & gas industry. Keppel Corp’s more diversified than Sembcorp Marine as it has a sizeable property arm, but its Offshore & Marine segment still makes up the majority of its revenue.
Given this, investors may look at the two companies and think: Which of the two is the stronger oil & gas dividend stock right now?
There are many things to look at in order to arrive at an answer, but in here, let’s focus on four aspects of their business fundamentals: Their dividend yields; their payout ratios; their historical dividend growth rates; and how strong their balance sheets are.
A stock’s dividend yield tells us how much bang for our buck we’re getting in dividends if we invest in it. Here’s how the math works: If a stock has a yield of 5%, we’d be getting $50 in annual dividends if we have S$1,000 invested in it. The higher the yield number is, the more an investor can theoretically benefit.
At Keppel Corp’s current share price of S$5.34, it has a yield of 6.4% thanks to its annual dividend of S$0.34 per share in 2015. As for Sembcorp Marine, its yield is just 3.9% with its stock price of S$1.55 and 2015 annual dividend of S$0.06 per share.
There are two payout ratios that I’m interested in. The first measures a stock’s dividend as a percentage of its earnings (let’s call this the earnings payout ratio) while the second replaces the stocks’ earnings with its free cash flow (let’s call this the cash flow payout ratio).
Both ratios provide us with an indication of how much margin of safety there is for a stock to maintain or grow its dividends in the future. In general, the higher the ratio is, the less room for error there is for the company.
Here’s how Keppel Corp and Sembcorp Marine stack up:
Source: S&P Global Market Intelligence
As you can see from the chart, Keppel Corp comes out ahead as it is the one with the positive earnings payout ratio and the more negative cash flow payout ratio. (If a company has a deeply negative free cash flow figure, its cash flow payout ratio will be a small negative number.)
But, it should be noted that a negative cash flow payout ratio is not something that’s generally associated with a healthy dividend stock as it alludes to the company’s inability to generate cash from its business.
Historical dividend growth
While a stock’s past achievements are no guarantee of its future successes, they do give us a useful basis for thinking about the future. It’s for this reason that I want to observe the historical growth rates for Keppel Corp and Sembcorp Marine’s dividends.
You can see in the following chart how both companies’ dividends have changed over the past decade:
Source: S&P Global Market Intelligence
From 2005 to 2015, Keppel Corp’s dividends have grown by 63% in total whereas the selfsame figure for Sembcorp Marine is just 10.5%.
Strength of the balance sheet
Dividends do not come with guarantees. A company with a weak balance sheet – one that’s heavily weighed down by debt – is at higher risk of having to reduce or eliminate its dividends when its business runs into temporary difficulties as compared to a firm with a robust balance sheet that has minimal or zero debt.
Keppel Corp comes in ahead of Sembcorp Marine yet again. The former currently has a net-debt (total borrowings minus cash & equivalents) to shareholder’s equity ratio of 60%, which is much lower than the latter’s 115%.
That said, a positive net-debt to equity ratio in itself increases the risk profile of a company since there is debt.
A Fool’s take
It’s obvious that Keppel Corp’s the ultimate winner here based on the four measures I’ve used. But, Keppel Corp’s weak balance sheet and lack of free cash flow would still be risk factors that investors may want to keep in mind.
In any case, all that we’ve seen should not be taken as the final word on the investing merits of the two companies. A deeper study is needed before any investing decision can be reached.
For more insights on dividend investing and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
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.