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A Look At Oversea-Chinese Banking Corp Limited’s Dividend From 3 Important Investing Angles

Oversea-Chinese Banking Corp Limited (SGX: O39) is a company that has consistently paid an annual dividend over its last 10 fiscal years.

But that is then and this is now. Can the company, which is one of Singapore’s largest banks, sustain its dividend in the future? Unfortunately, there is no easy answer. There is no simple calculation that can tell investors for sure whether a company’s dividend can be maintained 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. What I would like to find out here is if OCBC has seen any losses or big dips in profit over its last five fiscal years.

ocbc-net-profit-table
Source: S&P Global Market Intelligence

From the numbers above, we can see that OCBC’s net profit had declined sharply by 31% in 2013. But, that was due to a significant one-off capital gain of S$1.2 billion recognised in 2012 as a result of the bank’s sales of its stakes in certain companies and a property.

Excluding the one-off gain, 2012’s profit would have been S$2.83 billion, and so the bank’s net profit would have been growing in each year since 2011.

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.

OCBC had paid a dividend of S$0.36 per share in 2015. With its earnings per share of S$0.952 in the same year, that works out to a pay-out ratio of 38%.

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 ratios (believe me when I say ‘many’) investors can use to gauge the strength of a bank’s balance sheet.

Let’s look at the leverage ratio here, which refers to a bank’s total assets divided by its shareholders’ equity.

In general, the lower the ratio is, the better it could be. A bank with a leverage ratio of 20 would see its equity completely burnt if its assets decline in value by 5%. On the other hand, a bank with a leverage ratio of 10 can withstand a fall in its assets’ value of up to 10%.

As of 30 June 2016, OCBC had total assets of S$395.7 billion and shareholders’ equity of S$35.8 billion. This gives rise to a leverage ratio of 11.

A Fool’s take

To sum up what we’ve seen with OCBC, it is a bank with a track record of growing its profit, a pay-out ratio of only 38%, and a leverage ratio of just 11.

In any case, it’s worth reiterating that all that we’ve seen with OCBC above should not be taken as the final word on its investing merits – after all, those are just historical numbers. There is no guarantee that the company will perform similarly in the future.

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.