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

Jardine Matheson Holdings Limited (SGX: J36) is a conglomerate with various business interests.

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

Unfortunately, there is no easy answer for the important question above. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple calculation that can tell us 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 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 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 profits in 2012. This is due to a significant property revaluation in 2011. Excluding the one-off gain, 2011 net profit would have been US$1.5 billion.

The pay-out ratio

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 a dividend.

There are two things to keep in mind. In general, (1) 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, 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 at a payout 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 dividends. 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 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%.

Overall, Jardine Matheson performs well in all of the 3 tests above. So, it should not have a 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. After all, there are other factors that could 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.