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A Look At Jardine Matheson’s Track Record As A Dividend Stock

Jardine Matheson Holdings Limited (SGX: J336) is a conglomerate with various business interests.

The company has consistently paid dividends for the last 10 years. But are the dividends sustainable in the future?

Unfortunately, there is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple calculation that can tell investors 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 ones: (1) the company’s track record of generating a profit, (2) the company’s pay-out ratio, and (3) how strong the company’s balance sheet is.

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 whether Jardine Matheson has seen any losses or big dips in profit over the past five years. See below:

2011 2012 2013 2014 2015
Net profit 3084 3449 1671 1566 1710 1799
% change from last year -52% -6% 9% 5%

From the numbers above, we can see that there was a significant drop in profit in 2012. This is due to a substantial property revaluation in 2011. Excluding the one off gain, 2011 net profit would have been USD$ 1.5 billion.

The pay-out ratio

In investing parlance, the pay-out ratio refers to the amount of a company’s profit that is paid out to shareholders as dividends. It is often expressed as a percentage and a pay-out ratio of 100% means that a company is paying out all its profit as dividends.

There are two things to keep in mind. In general, (1) pay-out 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, and (2) the lower the ratio is, the better it is.

A low pay-out ratio would mean that a company has room for error, when it comes to sustaining its dividends in the future.

Here, Jardine Matheson has paid a dividend of USD$1.45 per share in the year ending December 2015. With its underlying earnings per share of USD$3.65 in the same year, that works out to a pay-out ratio of 40%.

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 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 shareholder’s 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 shareholder’s equity.

In the case of Jardine Matheson, its latest financials show that it has a debt to equity ratio of 55%. This is reasonable since it is below 100%.

A Fool’s take

Overall, Jardine Matheson performs well in all three tests. It should, therefore, have no problem of sustaining future dividends at the current rate.

Nevertheless, it’s worth reiterating that all that we’ve seen with the company above should not be taken as the final word on its investing merits. After all, there are other factors that will affect the dividend payment of a company.

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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.