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A Look At Venture Corporation’s Track Record As A Dividend Stock

Venture Corporation Ltd (SGX: V03) is an electronics manufacturing services provider with expertise in a wide range of activities: printing & imaging, networking & communications, retail store solutions & industrial, computer peripherals & data storage and test & measurement / medical & life science / others.

The company has consistently paid dividends in the past 10 years. But is Venture Corporation’s dividend sustainable in the future?

There is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple calculation that can tell us whether a company’s dividend is sustainable.

That said, there certain clues we can look out for.

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 there any losses or big dips in profit over the past five years.

2011 2012 2013 2014 2015
Net profit 156 140 131 140 154
% change from last year -10% -6% 7% 10%

From the numbers above, we can see that net profit fell from 2011 to 2013 before recovering in 2015. In other words, net profit has been volatile.

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.

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 some margin for error, when it comes to sustaining its dividends in the future.

Here, Venture had paid a dividend of $0.50 per share in year ending December 2015. With its earnings per share of $0.59 in the same year, that works out to a pay-out ratio of 85%.

Strength of the balance sheet

Dividends are generally paid out to investors in the form of cash. Thus, a company must have enough cash 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 resources needed to help 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 Venture, its latest financials show that it has a net-debt to equity ratio of 5.2%.

A Fool’s take

Overall, it seems that Venture should not have any problem paying out dividends in the near future, due to its strong balance sheet. Nevertheless, investors should pay attention to the company’s volatile profits.

It’s worth reiterating that all that we’ve seen with Venture above should not be taken as the final word on its investing merits. 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.