SATS Ltd (SGX: S58) is a company that has consistently paid an annual dividend over the last 10 years, as shown in this article. This raises the question as to whether SATS’s dividend is sustainable. There is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple way for us to tell for sure whether a company’s dividend is sustainable. That said, there are 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:…
This raises the question as to whether SATS’s dividend is sustainable.
There is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple way for us to tell for sure whether a company’s dividend is sustainable.
That said, there are 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 track record of generating a profit.
(2) The pay-out ratio and
(3) The strength of the balance sheet.
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 if SATS has seen any losses or big dips in profit over the past five years.
|% change from last year||8%||-3%||9%||13%|
From the numbers above, we can see that except for a small blip in 2014, SATS’s net profit has been rising for the last 5 years.
The pay-out ratio
In investing parlance, the payout ratio refers to the proportion of a company’s profits that are paid out as dividends. It is often expressed as a percentage. A payout ratio of 100% means that a company is paying out all its profit as dividends.
There are two things to bear in mind. In general the payout 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. Secondly, the lower the ratio, the better it is.
A low payout ratio would mean that a company has some margin of safety, when it comes to paying future dividends.
SATS had paid a dividend of S$0.15 per share in year ending March 2016. With its earnings per share of S$0.197, that works out to a pay-out ratio of 76%.
Strength of the balance sheet
Dividends are 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 a dividend.
Generally speaking, a company with a strong balance sheet has the resources to help fund its dividend.
To gauge the strength of a company’s balance sheet, the ratio of net debt to shareholder equity 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 SATS, it has a strong balance sheet with net debt to equity ratio of 7.4%.
A Fool’s take
Overall, it seems like SATS performs positively in all three tests.
Nevertheless, it’s worth reiterating that 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.