3 Charts That Show How Attractive Straco Corporation Ltd’s Dividends Are

When it comes to dividend stocks, there are a few things I like to look at: A company’s track record with paying a dividend; the company’s ability to generate free cash flow; and the strength of the company’s balance sheet.

Tourism assets owner and operator Straco Corporation Ltd (SGX: S85) is a company with a small yield of just 3.1% at its current stock price of S$0.80. But, I have a few charts that illustrate how well the company does on the three points I mentioned above, thus making its dividends attractive.

The first chart is on Straco’s dividend track record.

Chart 1 - Straco's total dividend per share from 2006 to 2015
Source: S&P Global Market Intelligence

Straco first paid a dividend in 2006. At that time, the payout was just 0.25 cents per share. Over the years, the company has either maintained or grown its dividend. In 2015, Straco’s dividend had grown to 2.5 cents per share (this is what gives the company its 3.1% yield).

Next, we have a chart showing Straco’s operating cash flow per share, free cash flow per share, and dividend per share.

Chart 2 - Straco's total dividend, operating cash flow, and free cash flow per share from 2006 to 2015
Source: S&P Global Market Intelligence

A company’s free cash flow can be an important thing to look at. Dividends are ultimately paid using cash and a company can get hold of cash from a few ways such as taking on debt, issuing new shares, selling assets, or generating cash from its daily business activities.

Each source of cash may be suitable depending on the circumstances, but generally, the last option is the most sustainable choice. This is where free cash flow comes into play. It measures the actual cash flow generated by a company’s business activities (also known as operating cash flow) that’s left after the firm has spent the necessary amounts needed to maintain its businesses at their current states.

The more free cash flow that a company can produce in the future, the higher its dividends can potentially be.

In Straco’s case, the company has grown its operating cash flow in nearly each year over the period from 2006 to 2015 and that has provided the fuel for its rising free cash flow. Moreover, the company’s dividend in 2015 is merely 35% of its free cash flow; this gives Straco a nice margin of error in trying to maintain its dividend.

Our last chart is on Straco’s balance sheet.

Chart 3 - Straco's net-cash position from 2006 to 2015
Source: S&P Global Market Intelligence

The company has maintained a rock-solid balance sheet over many years as seen in how it has always had more cash than borrowings (a positive net-cash position equates to having more cash than borrowings).

Having a strong balance sheet means a company has the resources to protect its dividends even during transitory tough business environments. A weak balance sheet, on the other hand, puts a company’s dividends at risk of being reduced or removed. This can happen because of a dire need for cash to service or repay debt, or because of terms and conditions set by the company’s lenders.

A Fool’s take

As the three charts above show, Straco has been growing its dividends and free cash flow over the years; its free cash flow is comfortably higher than its dividends; and it has a strong balance sheet that has minimal debt in relation to cash.

While these are likeable traits for an investor looking for dividend stocks, it should be noted that the work shouldn’t stop there. Straco has a great track record – but that’s no guarantee for its future business performance. Careful consideration of the company’s ability to continue growing its business in the years ahead is also needed before any investing decision 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 owns shares in Straco Corporation.