3 Charts That Show How Attractive Vicom Limited’s Dividends Are

When investing for dividends, there are a number of things about a company I like to study. There is the company’s track record with paying a dividend, its ability to generate free cash flow, and the strength of its balance sheet, among others.

Thanks to its 2015 dividend of S$0.285 per share, testing and inspections outfit Vicom Limited (SGX: V01) is a company with a market-beating yield of 4.9% at its current share price of S$5.85. But that’s not all – the company also ticks the right boxes with the three factors I mentioned above. You’d see why through the three charts below.

Chart 1 illustrates how Vicom’s dividend has grown over the past decade from 2005 to 2015.

Chart 1 - Vicom's total dividend per share from 2005 to 2015
Source: S&P Global Market Intelligence

While the company’s pay-outs have seen some ebb and flow over the years, there’s still an unmistakable upward climb. That’s something to like.

Chart 2 shows Vicom’s operating cash flow per share, free cash flow per share, and dividend per share for the same time period as Chart 1.

Chart 2 - Vicom's total dividend, operating cash flow, and free cash flow per share from 2005 to 2015
Source: S&P Global Market Intelligence

Dividends are ultimately paid by a company with cash. A company can get cash in a number of different ways, such as selling assets, borrowing money, issuing new shares, or simply generating cash from its business activities. In general, the last option is the most sustainable choice. And that is where free cash flow comes into play.

The cash that a company generates from its businesses is known in investing-speak as operating cash flow. But, capital is often needed by the company to maintain its businesses at their current states – the operating cash flow that is left over after that spending is known as free cash flow, and it is the raw fuel for dividends.

Coming back to Chart 2, we can see that Vicom’s operating cash flow and free cash flow have both grown steadily and strongly over the years under study. Moreover, Vicom’s dividends have tended to come in lower than its free cash flow.

In 2015, the company’s dividend was 77% of its free cash flow. That’s not the lowest ratio around, but it still gives Vicom some wriggle room in protecting its dividend.

We’re down to the last chart, Chart 3. It shows Vicom’s net-cash position from 2005 to 2015, where net-cash refers to total cash minus total borrowings.

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

Vicom’s balance sheet has been strong over the past decade given that it has had zero debt. That’s not all – the company’s net-cash position has also been rising over the years, strengthening the balance sheet.

The presence of a strong balance sheet gives a company higher odds of being able to protect its dividend even when it runs into temporary business difficulties. On the other hand, a weak balance sheet – one that is laden with debt – puts a company’s dividend at risk of being reduced or eliminated, especially when times are tough.

A Fool’s take

To sum up what Charts 1, 2, and 3 have shown us, Vicom is a company with (1) a track record of growing its dividends and free cash flow, (2) a company that’s not paying out too much of its free cash flow as a dividend, and (3) a rock-solid balance sheet.

These are all likeable traits to see in a company for investors who are out hunting for sustainable dividends. But, it should be noted that more work needs to be done before any firm investing conclusion can be made on Vicom. The company has done some great things in the past, but there’s no guarantee that the future will be the same.

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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 Vicom.