Does Singapore Post Limited Have The Cash To Support Its New Dividends?

When Singapore Post Limited (SGX: S08) released its results for the second quarter of its financial year ending 31 March 2017 (FY16/17) last month, it revealed a 33% reduction in its interim dividend.

The decision to cut the dividend was not unexpected. In Singapore Post’s Annual General Meeting (AGM) in mid-July this year, the company’s chairman Simon Israel said that the firm was reviewing its dividend policy. This was a hint on what was to come.

The company’s new dividend policy was revealed in its aforementioned earnings release: Singapore Post’s dividend will now be based on a pay-out ratio ranging between 60% and 80% of the company’s underlying net profit for each financial year. The previous policy was based on an absolute amount.

Since the decision to enact a new dividend policy – which has resulted in a lower dividend – has been taken, the next question becomes whether the current dividend can be supported.

Show me the money

In a previous article, I talked about the importance of tracking Singapore Post’s free cash flow when it comes to assessing its dividend. Free cash flow is one source of dividends for a company.

But in the short term, Singapore Post is not expected to generate meaningful amounts of free cash flow due to investments it its making. Thus, we can look at the next source of dividends, the firm’s cash position.

As of 30 September 2016, Singapore Post has $158 million in cash and equivalents and total borrowings of about $406 million. This gives it a net debt position of $248 million. This compares with the $88 million net cash position seen a year ago.

In short, Singapore Post has gone from a net cash position to a net debt position over the past year.

What happened

In Singapore Post’s latest fiscal second quarter earnings briefing, the group’s covering chief executive and group chief financial officer Mervyn Lim gave his take on the debt situation:

“If you look at the cost of borrowing, it is difficult not to go short term. But having said that, our net debt position is still $248M; it’s gone up from $153M [in FY15/16’s fourth quarter] and the reason is of course because of our additional borrowings for that reason that I said.”

Lim also felt that Singapore Post’s gearing level can be considered to be low:

“But in terms of whether we are comfortable with 21.0% gearing level, you know what, it is still very low.”

This signals that Singapore Post may consider increasing its debt in the future. Lim is also cognisant of shareholders’ risk appetites, however:

“Is that the optimal capital structure? I think as I mentioned to you, we are very much guided by our shareholders who are very risk averse and so while we can still take on more debt, we are mindful that we need to try and balance it up with the risk profiles of our shareholders and investors.

And in particular, can we take up more debt if we want to? Yes we can, because if we look at the interest cover it is a very healthy 26.6X, which is just marginally lower than 29.8X which is the previous period.

So yes, we can take on. Do we want to? Maybe not at this moment because we want to balance that with the risk profile of our investors.”

At the moment, Singapore Post seems to be leaving the door open when it comes to taking on more debt – the company certainly thinks it has the wherewithal to do so. But, it might moderate the amount of debt it takes on due to considerations about its shareholders’ risk profiles.

As investors, it might be better to judge Singapore Post’s balance sheet again once its current investment cycle tapers down.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.