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Are You Aware Of 1 Key Risk With The Tasty Dividend Yield Of Valuetronics Holdings Limited?

Electronics manufacturing services provider Valuetronics Holdings Limited (SGX: BN2) is one stock with a tasty dividend yield right now.

At its current share price of S$0.535, the company has a yield of some 6.5% thanks to its dividend of HK$0.20 (around S$0.0347) per share for its fiscal year ended 31 March 2016 (fiscal 2016).

When it comes to investing for dividends, there are a number of important things about a company that investors should study. Three are: 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.

Valuetronics does tick the three boxes.

Things to like

First, as Chart 1 below shows, Valuetronics has been dishing out an annual dividend in each year since its listing in March 2007. Moreover, those dividends have steadily grown over time; its HK$0.20 per share dividend for fiscal 2016 is over three times the HK$0.063 dished out for fiscal 2007.

Chart 1 - Valuetronics' total dividend per share from fiscal 2007 to fiscal 2016
Source: S&P Global Market Intelligence

Second, Valuetronics is adept at generating free cash flow, the raw fuel for dividends. The chart below, Chart 2, shows the company’s free cash flow since fiscal 2007. It’s worth mentioning too that Valuetronics’ dividend per share for fiscal 2016 is merely 29% of its free cash flow per share of HK$0.694 for the same year.

Chart 2 - Valuetronics' free cash flow per share from fiscal 2007 to fiscal 2016
Source: S&P Global Market Intelligence

Third, we have the balance sheet picture: Valuetronics has a rock-solid balance sheet. Based on its latest financials (that would be for the fourth-quarter of fiscal 2016), the company has zero debt and HK$689 million in cash.

An important risk

But, there is also an important risk to the company’s business, namely, the risk of customer-concentration.

When a company depends only a handful of customers for business, it may be dangerous. Just think of what would happen to the company’s business if those customers collapse or decide to walk away?

In Valuetronics’ fiscal 2016, the company generated total revenue of HK$1.95 billion. Of that sum, 54% (or HK$1.048 billion), came from just three customers, “each of which accounted for 10% or more” of Valuetronics’ revenue. In other words, more than half of the firm’s business came from just three companies.

To the company’s credit, this is an improvement from fiscal 2015, when three major customers accounted for 68% of total revenue. But, the firm’s current high level of customer concentration is still something to keep an eye on.

A Fool’s take

I’m not trying to say Valuetronics is necessarily a good stock to invest in for dividends because of its track record with growing its dividend, its historical ability to generate free cash flow, and its strong balance sheet. There are many other aspects of the business to study too.

Similarly, Valuetronics’ high level of customer concentration is not necessarily a deal-breaker. The company has had high customer concentration for a number of years and yet its business is still fine. But, it’s still something crucial for current or prospective investors of the company to be aware of.

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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.