What Could Happen To SIA Engineering Company Ltd’s Future Dividends?

Aircraft maintenance, repair, and overhauling services provider SIA Engineering Company Ltd (SGX: S59) has been dishing out dividends to its shareholders for many years. In fact, the company has consistently paid an annual dividend in its last 10 fiscal years.

But, that is then and this is now. How might SIAEC’s dividend change in the future?

There is no easy answer and all investors can do is to think about how the company’s business might perform in the years ahead as well as try to find some clues from the company’s historical business performance.

In terms of the company’s historical business performance, there are many important things to look at. But in here, we’d focus on just two aspects: The company’s free cash flow and the level of cash and debt.

Free Cash Flow

For SIAEC to sustain its current dividend payments, it should first be able to generate enough cash to have some leftovers after it pays its bills and invests in its business (this investment is also known as capital expenditure). Then, the leftover cash (which is known as free cash flow) should ideally be higher than the dividends paid.

In its fiscal year ended 31 March 2016 (FY2016), SIAEC had declared a total dividend of S$0.14 per share. At the company’s current share count of 1.121 billion, that works out to a total cash outlay of around S$169.5 million. In the first six months of FY2017, SIAEC has generated free cash flow of S$39.8 million (operating cash flow less capital expenditure plus dividend from associates and joint ventures).

Amount of cash on hand and debt

The level of cash and debt is a gauge of how strong or weak a company’s balance sheet is. In general, when debt is really high, a company runs the risk of having to eliminate or reduce its dividends when its business runs into temporary difficulties.

As of 30 September 2016, SIAEC has S$539.8 million in cash and short-term deposits and just S$32.3 million in total debt.

A Foolish conclusion

As we’ve seen, SIAEC has generated free cash flow of S$39.8 million to date in its current fiscal year.

If the company can’t improve its free cash flow generation in FY2017 and the years ahead, it is highly probable that the company will need to tap into its cash hoard to pay its dividends in the future should it decide to sustain the amount at last year’s level or raise the payout.

Fortunately, given the company’s large cash balance and low debt, it has the means to do so over the short-term at least.

But, it’s worth noting too that the amount of dividend SIAEC pays out in the end is ultimately up to its management to decide and that the company is currently facing a challenging business environment.

It’s also important to keep in mind what I had mentioned earlier: When it comes to an assessment of a company’s future dividend, there are many important things to look at beyond its free cash flow and cash and debt levels.

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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.