CapitaLand Limited (SGX: C31) is a real estate developer and owner and is one of the largest companies in Singapore’s stock market with its market capitalisation of over S$12.7 billion
The company has been paying an annual dividend consistently over the last 10 years. But, it’s also important for investors to consider the future: How sustainable is the company’s current dividend?
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Unfortunately, there is no easy answer. But, 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 important aspects: (1) the company’s profit history, (2) a comparison of the company’s free cash flow and dividend, and (3) the company’s balance sheet strength.
Balance sheet strength
Dividends are paid out to investors ultimately in the form of cash.
In other words, a company must have enough cash on hand 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 resources needed to help fund its dividend. (It should also be noted that borrowing money to pay a dividend is not ideal.)
To gauge the strength of a company’s balance sheet, there are two things we can look at, amongst many others: A company’s current cash balance; and the company’s debt to shareholders’ equity ratio. In general, we are looking out for a high cash balance sheet and a low debt to shareholders’ equity ratio.
CapitaLand currently has a cash balance of S$4.24 billion and a debt to shareholders’ equity ratio of 91.7%. That’s a reasonably strong balance sheet.
A Foolish Conclusion
Earlier in this article, I had shared three things about a company’s business investors could like at to give them clues on how sustainable the company’s dividend is. The third is something we have just studied. As for the first and second, it turns out that:
- CapitaLand has a mediocre profit history; and
- the company managed to generate enough free cash flow over the past five years to cover its dividends paid over the same period.
So if I put the three things together, CapitaLand is a company that has (1) a mediocre profit history, (2) paid a dividend that’s within its means, and (3) a reasonably strong balance sheet.
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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.