A Look At Singapore Exchange Limited’s Track Record As A Dividend Stock

Singapore Exchange Limited (SGX: S68) or SGX for short, is the only stock exchange in Singapore. The company has three business lines, namely, Equities & Fixed Income, Derivatives, and Market Data & Connectivity.

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

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. (1) The company’s track record of generating profits, (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 Singapore Exchange has seen any losses or big dips in profit over the past five years. See below:

S$ million 2012 2013 2014 2015 2016
Net profit 295 292 336 320 349 349
% change from last year 15% -5% 9% 0%

From the numbers above, we can see that except for a blip in 2014, Singapore Exchange has been quite consistent in either growing or sustaining profitability.

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 a dividend. It is often expressed as a percentage. 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) pay-out ratios should be less than 100%, as it’s tough for a company to sustain its dividend if it is paying out all its profit and (2) the lower the ratio, the better it is.

A low pay-out ratio would mean that a company has some margin for error when it comes to sustaining its dividends.

Here, Singapore Exchange has paid a dividend of S$0.28 per share in FY 2016. With its underlying earnings per share of S$0.31 in the same year, that works out to a pay-out ratio of 90%.

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 necessarily resources to 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 Singapore Exchange, its latest financials show that it has a debt to equity ratio of 0%.

A Fool’s take

Overall, Singapore Exchange performs well in all of the above tests.

Nevertheless, the high dividend pay-out ratio of close to 100% means that the company has little room for error in term of sustaining profitability. A significant drop in profit, say by 15-20% could trigger dividend cut.

Nevertheless, it’s worth reiterating that the above analysis 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. The Motley Fool Singapore has recommended shares of Singapore Exchange. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.