A Look At Dairy Farm International Holdings Ltd’s Track Record As A Dividend Stock

Dairy Farm International Holdings Ltd (SGX: D01) is a company that has consistently paid an annual dividend over its last 10 fiscal years.

This raises the question: Is Dairy Farm’s dividend sustainable in the future?

Unfortunately, there is no easy answer for the important question above. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple calculation that can tell investors for sure whether a company’s dividend is sustainable.

That said, there are some things about a company’s business we can look at for clues. Here are three of them, keeping in mind that they are not the only important aspects: (1) the company’s track record of generating a profit, (2) the company’s pay-out ratio, and (3) how strong the company’s balance sheet is.

Track record in generating a profit

A company’s profits are an important source of its dividends. What I would like to find out is if Dairy Farm has seen any losses or big dips in profit over the past five years.

Dairy Farm net income table
Source: S&P Global Market Intelligence

You can see from the table above that Dairy Farm’s profit had suffered a 16.6% decline in 2015.

The pay-out ratio

In investing parlance, the pay-out ratio refers to the amount of a company’s profit that is paid out to shareholders as a dividend. It is often expressed as a percentage and a pay-out ratio of 100% means that a company is paying out all its profit as a dividend.

There are two things to keep in mind. In general, (1) pay-out ratios should be less than 100% as it’s tough for a company to sustain its dividend if it’s paying out all its profit, and (2) the lower the ratio is, the better it is. A low pay-out ratio would mean that a company has some nice room for error when it comes to sustaining its dividends in the future.

Dairy Farm had paid a dividend of US$0.20 per share in 2015. With its earnings per share of US$0.314 in the same year, that works out to a pay-out ratio of 64%.

Strength of the balance sheet

Dividends are paid out to investors in the form of cash. Thus, a company must have enough cash in the till or at least have the ability to borrow money (if necessary) to pay its dividend. Generally speaking, a company with a strong balance sheet has the resources needed to help fund its dividend.

To gauge the strength of a company’s balance sheet, the net-debt to shareholder’s equity ratio can be used (net-debt refers to total borrowings and capital leases net of cash and short-term investments). A ratio of over 100% would mean that a company’s net-debt outweighs its shareholder’s equity.

In the case of Dairy Farm, its latest financials show that it has a net-debt to equity ratio of 35%, according to data from S&P Global Market Intelligence.

A Fool’s take

To sum it up, while Dairy Farm’s historical profit picture looks shaky, it has a pay-out ratio and net-debt to equity ratio of just 64% and 35%, respectively. It’s worth reiterating that all that we’ve seen with Dairy Farm above should not be taken as the final word on its investing merits – as I had mentioned earlier, there are many other aspects of the company’s business to study when it comes to assessing the sustainability of its dividend.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.