Singapore Post Limited (SGX: S08) is a company that has consistently paid an annual dividend over its last 10 fiscal years. But that’s in the past. The important question is can Singapore Post sustain its dividend in the future? Unfortunately, there is no easy answer. There just isn’t a simple formula that can tell us for sure whether a company’s dividend is sustainable or not. But, there are still some things about a company’s business we can look at to help clear up some of the fog. Here are three of them, keeping in mind that they are not…
But that’s in the past. The important question is can Singapore Post sustain its dividend in the future?
Unfortunately, there is no easy answer. There just isn’t a simple formula that can tell us for sure whether a company’s dividend is sustainable or not.
But, there are still some things about a company’s business we can look at to help clear up some of the fog.
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
A company’s profits are an important source of its dividends. Generally speaking, it’s tough for a company to continue paying a dividend if it has no profit.
What I want to find out here is if Singapore Post has seen any losses or big dips in profit over its last five fiscal years.
Source: S&P Global Market Intelligence
You can see from the table above that Singapore Post’s net profit has remained within a tight band from FY2012 (fiscal year ended 31 March 2012) to FY2015 before spiking in FY2016.
The pay-out ratio
The pay-out ratio refers to the amount of a company’s profit that is paid out to shareholders as a dividend. It is expressed as a percentage and a pay-out ratio of 100% would mean that a company is paying out all its profit as a dividend.
There are two things to keep in mind with the pay-out ratio in general. First, pay-out ratios should ideally be less than 100% – it’s not easy for a company to sustain its dividend if it is paying out all its profit or more. Second, the lower the ratio is, the better it could be – a low pay-out ratio often corresponds with a large margin of error for a company when it comes to paying a dividend.
Singapore Post had paid a dividend of S$0.07 per share in FY2016. Given its earnings per share of S$0.109 in that year, the company thus has a pay-out ratio of 64%.
Strength of the balance sheet
A strong balance sheet gives a company higher odds of being able to protect 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 Singapore Post, its latest financials (as of 31 March 2016), show that it has a net-debt to equity ratio of just 9%.
A Fool’s take
All told, Singapore Post is a company with a track record of steady earnings, a pay-out ratio of less than 100%, and a net-debt to shareholder’s equity ratio of just 9%.
Yet, it’s worth repeating that all that we’ve seen with Singapore Post above should not be taken as the final word on its investing merits – as I had mentioned earlier, there are many other aspects of a 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.