Dairy Farm International Holdings Ltd (SGX: D01) is a company in Singapore?s stock market that has consistently paid an annual dividend over its last 10 fiscal years.
This fact raises the question: Is Dairy Farm?s dividend sustainable in the future?
Unfortunately, there is no easy answer. There is simply no plug-and-play formula that can tell investors for sure whether a company?s dividend is sustainable.
But, there are still 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: (1) the company?s profit history, (2) the company?s…
Dairy Farm International Holdings Ltd (SGX: D01) is a company in Singapore’s stock market that has consistently paid an annual dividend over its last 10 fiscal years.
This fact raises the question: Is Dairy Farm’s dividend sustainable in the future?
Unfortunately, there is no easy answer. There is simply no plug-and-play formula that can tell investors for sure whether a company’s dividend is sustainable.
But, there are still 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: (1) the company’s profit history, (2) the company’s pay-out ratio, and (3) how strong the company’s balance sheet is.
A company’s profits are an important source for its dividends. What I’m interested in here is Dairy Farm’s track record in generating a profit in its last five fiscal years. Have there been any instances of losses or big declines in profit?
Source: S&P Global Market Intelligence
From the numbers above, we can see that Dairy Farm has been consistently profitable. And while its profit has declined from 2011 to 2015, the magnitude is not large.
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 often expressed as a percentage and a pay-out ratio of 100% means that a company is paying out all its profit as a dividend.
There are two things to keep in mind here in general. First, pay-out ratios should be less than 100% – it’s tough for a company to sustain its dividend if it’s paying out all its profit. Second, the lower the ratio is, the better it could be. The second point is connected to the first – if a company is not paying out all its profit as a dividend (or paying out more than its profit), it has some room for error to protect its pay outs.
In 2015, Dairy Farm had paid a dividend of US$0.20 per share. With its earnings per share of US$0.31 in the same year, that works out to a pay-out ratio of 65%.
Strength of the balance sheet
Generally speaking, a company with a strong balance sheet has higher odds of being able to protect its dividend. When a company has a weak balance sheet – one that is bloated with debt – its dividends run a higher risk of being cut or removed entirely due to restrictions from creditors or a simple lack of cash.
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 Dairy Farm, its latest financials (as of 30 June 2016) show that it has a net-debt to equity ratio of 43%.
A Foolish Conclusion
In all, Dairy Farm is a company that has consistently generated a profit over its last five years, a pay-out ratio of less than 100%, and a net-debt to shareholder’s equity that’s also less than 100%.
At this point, it’s worth repeating that all that we’ve seen with Dairy Farm above should not be taken as the final word on its investing merits. As I had mentioned earlier, there are other aspects of a company’s business to study when it comes to assessing the sustainability of its dividend.
Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended Dairy Farm International Holdings. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.