Frasers Centrepoint Ltd (SGX: TQ5) is a relatively new company in Singapore?s stock market, considering that it got listed only in January 2014 by way of a spin-off.
It is a company with wide interests within the real estate space ? Frasers Centrepoint develops and invests in properties, and also manages various real estate investment trusts that have an individual focus on property sectors such as retail, commercial, and hospitality.
At the company?s current share price of S$1.51, it has a dividend yield of 5.7% thanks to its dividend of S$0.086 per share for its fiscal year ended 30 September 2016…
Frasers Centrepoint Ltd (SGX: TQ5) is a relatively new company in Singapore’s stock market, considering that it got listed only in January 2014 by way of a spin-off.
It is a company with wide interests within the real estate space – Frasers Centrepoint develops and invests in properties, and also manages various real estate investment trusts that have an individual focus on property sectors such as retail, commercial, and hospitality.
At the company’s current share price of S$1.51, it has a dividend yield of 5.7% thanks to its dividend of S$0.086 per share for its fiscal year ended 30 September 2016 (FY15/16). For perspective, this yield of 5.7% is higher than the SPDR STI ETF’s (SGX: ES3) yield of 3.2%; the SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).
But, investors should note that a company’s yield says nothing about the sustainability of its dividend in the future. This raises the question: Can Frasers Centrepoint at least maintain its dividend at the current level in the future?
There is no easy answer. There is just 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.
A company’s profits are an important source of its dividends. What I would like to find out is if Frasers Centrepoint has seen any losses or big dips in profit over the past five years.
Source: Frasers Centrepoint’s annual report and earnings release
From the numbers above, we can see that Frasers Centrepoint’s attributable profit (before fair value changes and exceptional items) was climbing in each year from FY11/12 to FY14/15 before falling 12% in FY15/16.
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.
As already mentioned, Frasers Centrepoint’s total dividend for FY15/16 is S$0.086 per share. With its earnings per share (before fair value changes and exceptional items) of S$0.143 in the same year, Frasers Centrepoint has a pay-out ratio of 60%.
Strength of the balance sheet
Dividends are paid out to investors in the form of cash. Thus, a company must have enough cash in the till 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 shareholders’ 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 shareholders’ equity.
In the case of Frasers Centrepoint, it has net-debt of S$7.63 billion and shareholders’ equity of S$6.66 billion as of 30 September 2016. This gives rise to a net-debt to shareholders’ equity ratio of 114%.
A Fool’s take
To sum up what we’ve seen, Frasers Centrepoint is a company with a decent track record of growing its profit and a pay-out ratio of just 60%. But, it also has a net-debt to shareholders’ equity ratio of 114%.
In any case, it’s worth reiterating that all that we’ve seen with Frasers Centrepoint above should not be taken as the final word on its investing merits – after all, like I already mentioned, 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.