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Riverstone Holdings Limited’s Dividend Has Soared By 400% Since 2006: 3 Things Investors Should Know

Credit: Simon Cunningham

Riverstone Holdings Limited (SGX: AP4)  is a company that manufactures rubber gloves that are used in cleanrooms. It also manufactures rubber gloves that are used in the healthcare industry.

The company has exhibited strong business growth over the past decade. From 2006 to 2015, Riverstone’s revenue and net profit has climbed at compound annual rates of 18.4% and 21.4% respectively.

The company first paid an annual dividend in 2006 and has been dishing out a dividend ever since. Its dividend has also increased by 400% from RM0.0129 per share in 2006 to RM0.0645 in 2015.

Given the company’s strong business and dividend growth, this may lead investors to wonder: Can Riverstone sustain or grow its dividend in the future?

Unfortunately, there is no easy answer. There’s no calculation that can tell investors for sure whether a company’s dividend is sustainable or not.

But, there are still 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 aspects: (1) the company’s profit history, (2) the company’s pay-out ratio, and (3) how strong the company’s balance sheet is.

Profit history

A company’s profits are an important source of its dividends. What I would like to find out is whether Riverstone has seen any losses or big dips in profit over the past five years. Here’s a table showing the company’s profit from 2011 to 2015:

riverstone-net-income-table
Source: S&P Global Market Intelligence

Turns out, Riverstone’s profit has been increasing in each year for the period under study. In 2015, its profit actually jumped by 78%.

The pay-out ratio

The pay-out ratio refers to the percentage of a company’s profit that is paid out to shareholders as a dividend.

There are two related things to bear in mind here. First, pay-out ratios should be less than 100%; it’s tough for a company to maintain its dividend if it is paying out all its profit. Second, the logic thus follows that the lower the pay-out ratio is, the better it could be; a low pay-out ratio means that a company’s dividend has more buffer to absorb negative developments in the business.

Riverstone paid a dividend of RM0.0645 per share in 2015, as mentioned earlier. With its earnings per share of RM0.170 for that year, that works out to a pay-out ratio of just 38%.

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. (It should be noted that the latter option is far from ideal.)

Generally speaking, a company with a strong balance sheet has the resources needed to help fund its dividend.

There are many ways to gauge the strength of a company’s balance sheet. One way is to look at the amount of cash and debt a company has; ideally, a company should not have high levels of debt.

In the case of Riverstone, its latest financials (as of 30 September 2016) show that it has RM110 million in cash and equivalents and zero in debt.

A Fool’s take

In all, Riverstone is a company with a track record of consistent profit growth, a low pay-out ratio, and a balance sheet with zero debt.

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, like I already mentioned, there are many other aspects of a company’s business to study when it comes to assessing the sustainability of its dividend.

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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.