Jardine Strategic Holdings Limited (SGX: J37) is a company that has paid an annual dividend consistently over its last 10 fiscal years, as shown in this article. This raises the question: Is Jardine Strategic’s dividend sustainable in the future? Unfortunately, there is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple formula that can tell investors, with any certainty, whether a company’s dividend is sustainable. That said, there are some things about a company’s business that we can look at for clues. Here are three of them, keeping in mind that they…
This raises the question: Is Jardine Strategic’s dividend sustainable in the future?
Unfortunately, there is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple formula that can tell investors, with any certainty, whether a company’s dividend is sustainable.
That said, there are some things about a company’s business that we can look at for clues. Here are three of them, keeping in mind that they are not the only ones: (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. What we would like to find out is whether Jardine Strategic has seen any losses or big dips in profit over the past five years.
Source: Annual Reports
From the numbers above, we can see that net profit more than halved from 2011 to 2012. This is due to a significant property revaluation in 2011. Excluding the one-off property revaluation, net profit has moved from USD$ 1.58 billion in 2011 to USD$ 1.43 billion in 2015.
The Pay-out Ratio
In investing parlance, 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. 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. In general, (1) pay-out ratios should be less than 100% as it’s tough for a company to sustain its dividend if it’s paying out all its profit, and (2) the lower the ratio is, the better it is.
A low pay-out ratio would mean that a company has room for error, when it comes to sustaining its dividends in the future.
Jardine Strategic had paid a dividend of USD$0.285 per share in year ending December 2015. With its earnings per share of USD$3.25 in the same year, that works out to a pay-out ratio of 9%.
Strength of the Balance Sheet
Dividends are paid out to investors in the form of cash. Thus, a company must have enough cash in the bank or at least have the ability to borrow money (if necessary) to pay its dividend. Generally speaking, a company with a strong balance sheet has the necessary resources to fund 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 Jardine Strategic, its latest financials show that it has a net-debt to equity ratio of 43%, which is reasonable as it’s below 100%.
A Fool’s Take
Overall, it seems like Jardine Strategic should not have any problem paying out dividends in the near term due to its low pay-out ratio and reasonably strong balance sheet.
Nevertheless, it’s worth reiterating that all that we’ve seen with Jardine Strategic above should not be taken as the final word on its investing merits. As I mentioned earlier, there are many other aspects of the 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.