MENU

A Look At DBS Group Holdings Ltd’s Dividend From 3 Important Investing Angles

Singapore’s largest bank, DBS Group Holdings Ltd (SGX: D05), is a company that has consistently paid an annual dividend for the last 10 years, at least.

But past results are no guarantee of future performance. So, I wonder whether DBS Group’s dividend is sustainable.

Unfortunately, there is no easy answer. There is no simple calculation that can tell investors for sure whether a company’s dividend is sustainable or not.

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) how strong the company’s balance sheet is.

Profit history

A company’s profits are an important source of its dividends. What I would like to find out is if DBS Group has seen any losses or big dips in profit over the past five years.

dbs-profit-history
Source: S&P Global Market Intelligence

From the numbers above, we can see that other than a small drop in net profit in 2013, DBS Group has been steadily growing its profits for the timeframe under study.

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 keep in mind with the pay-out ratio. First, pay-out ratios should be less than 100%; it’s tough for a company to sustain its dividend if it is paying out all its profit. Second, the logic thus follows that the lower the ratio is, the better it could be; a low pay-out ratio means that a company has some nice room for error when it comes to maintaining its dividends in the future.

DBS Group paid a dividend of S$0.60 per share in 2015. With its earnings per share of S$1.71 in the same year, that works out to a pay-out ratio of 35%.

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%.

In the case of DBS Group, its latest financials (for 30 September 2016) show that it has total assets of S$465.5 billion and shareholders’ equity of S$44.1 billion, which give rise to a leverage ratio of 10.6.

A Fool’s take

In summary, DBS Group is a bank with a track record of steady profit growth, a pay-out ratio of only 35%, and a leverage ratio of 10.6.

In any case, it’s worth reiterating that all that we’ve seen with the bank 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 bank will perform similarly in the years ahead, especially since Singapore’s economic growth is expected to be low in the near future.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.