A Look At Sheng Siong Group Ltd’s Dividend From 3 Important Investing Angles

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore and could thus be a company that many living here are familiar with.

Sheng Siong was established in 1985 and has grown over the years to own a network of 41 stores in our Garden City. These stores are primarily located in the heartlands of Singapore.

The company was listed in 2011 and initiated its first annual dividend in the same year. Since then, Sheng Siong has consistently paid an annual dividend. But this raises the question: Can Sheng Siong sustain its dividend in the future?

Thing is, there is no easy answer. There’s no simple calculation that can tell investors for sure if a company can maintain or grow its dividend in the years ahead.

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) the strength of the company’s balance sheet.

Profit history

A company’s profits are an important source of its dividends. Has Sheng Siong seen any large losses or big declines in profit over the past five years? That’s what I’m interested in finding out.

Source: Sheng Siong 2015 annual report

Turns out, Sheng Siong has a history of growing its bottom-line. There was a slight 6.7% decline in profit in 2013, but other than that, there was growth in each year for the period under study. All told, Sheng Siong’s profit has more than doubled from S$27.3 milion in 2011 to S$56.8 million in 2013.

The pay-out ratio

The pay-out ratio refers to the percentage of a company’s profit that is paid out as a dividend.

There are two related things to bear in mind here. First, pay-out ratios should be less than 100%; it’s tough for a company to maintain its dividend if it is paying out all its profit. Second, the logic thus follows that the lower the pay-out ratio is, the better it could be; a low pay-out ratio means that a company’s dividend has more buffer to absorb negative developments in the business.

Sheng Siong’s trailing dividend comes in at S$0.0365 per share. With a trailing earnings per share of S$0.0404, the company thus has a pay-out ratio of 90%.

Strength of the balance sheet

A strong balance sheet gives a company a higher chance of being able to protect its dividend.

There are many ways to gauge the strength of a company’s balance sheet. One ratio to look at is the net-debt to shareholder’s equity ratio, where net-debt refers to total borrowings and capital leases net of cash and short-term investments. A ratio of more than 100% would mean that a company’s net-debt outweighs its shareholder’s equity.

Sheng Siong currently has zero debt, which brings its net-debt to negative territory.

A Fool’s take

To sum up, Sheng Siong is a company with steadily growing profits, a pay-out ratio of less than 100%, and zero debt.

In any case, it’s worth reiterating that all that we’ve seen with Sheng Siong 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.