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What Does CapitaLand Limited’s Free Cash Flow Say About The Sustainability Of Its Dividend?

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?

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.

In this article, I will address the second point. For the first and third, you can head here and here, respectively.

Free cash flow

For a company to be able to sustain its dividend payments, it must be able to generate cash to pay its bills and maintain its businesses at their current state. Left over cash can then be used to pay out dividends.

In the financial community, that left-over cash is known as free cash flow and it is found by subtracting a company’s capital expenditure from its cash flow from operations. It is not sustainable over the long-term for a company to pay out more in dividends as compared to the free cash flow it generates.

So, let’s look at a graph to illustrate CapitaLand’s free cash flow and dividends paid over the last five years from 2011 to 2015:

Source: CapitaLand’s annual reports (2011 to 2015)

And for those who are interested in how the numbers are derived, please see the table below:

Source: CapitaLand’s annual reports (2011 to 2015)

From the above, we can see that CapitaLand has been paying more dividends to shareholders than what it has generated in free cash flow in two out of the five years.

But despite that, CapitaLand has managed to generate total free cash flow over that five year period that adequately covers its total dividends paid; from 2011 to 2015, the total dividends paid was S$1.61 billion but total free cash flow generated was S$1.7 billion.

In other words, CapitaLand has been staying within its means.

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 second is something we have just studied. As for the first and third, it turns out that:

  1. CapitaLand has a mediocre profit history; and
  2. the company has a reasonably strong balance sheet.

(I had shared the links earlier for the analyses of CapitaLand’s profit history and balance sheet strength. Here they are again for convenience: profit history and balance sheet strength.)

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.