SIA Engineering Company Ltd (SGX: S59) is a company in Singapore?s stock market that has consistently paid an annual dividend over its last 10 fiscal years.
But that is then and this is now. The important question is: Can SIA Engineering?s dividend be sustained or raised in the future?
Unfortunately, there is no easy answer. Unlike a stock?s dividend yield, which is easy to calculate, there is no simple formula 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,…
SIA Engineering Company Ltd (SGX: S59) is a company in Singapore’s stock market that has consistently paid an annual dividend over its last 10 fiscal years.
But that is then and this is now. The important question is: Can SIA Engineering’s dividend be sustained or raised in the future?
Unfortunately, there is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple formula 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 to study: (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
In general, it’s hard for a company to continue paying a dividend if it has no profit. What I would like to find out is if SIA Engineering has seen any losses or big dips in profit over its past five fiscal years.
Source: S&P Global Market Intelligence
The table above shows that SIA Engineering’s profit has been declining over the last few years. Fiscal 2015 (year ended 31 March 2015) even saw the bottom-line drop by a pretty hefty 31%.
The pay-out ratio
The pay-out ratio is calculated by dividing a company’s dividend with its profit. It measures the amount of a company’s profit that is paid out to shareholders as a dividend – a pay-out ratio of 100% means that a company is paying out all its profit as a dividend.
There are two things to note here in general. First, pay-out ratios should ideally be lower than 100% as it’s tough for a company to sustain its dividend if it’s paying out all its profit and not retaining any for future growth. Next, the lower the ratio is, the better it is; a low pay-out ratio would correspond to a thick buffer for errors when it comes to a company trying to sustain its dividends in the future.
SIA Engineering had a dividend of S$0.14 per share for fiscal 2016. Since the company’s earnings per share was S$0.157 that year, the pay-out ratio is thus 89%.
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.
The net-debt to shareholder’s equity ratio can be a good gauge of how strong a company’s balance sheet is. A ratio of over 100% would mean that a company’s net-debt outweighs its shareholder’s equity. So, the lower the ratio is, the better it is.
SIA Engineering’s latest financials show that it has a net-cash position of S$361 million.
A Fool’s take
To conclude what we’ve seen, SIA Engineering’s business has been in decline over the past few years. Nevertheless, the company continues to have a cash-rich balance sheet and a pay-out ratio that is below 100%.
I’d like to emphasis again that what we’ve studied about SIA Engineering 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 research 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.