CapitaLand Limited (SGX: C31) is a real estate developer and owner and it 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.
A company’s profits are an important source of its dividends. And as we know, profit is what is left when we deduct a company’s costs from its revenue. So, ideally, a company should have:
- A track record of steady revenue growth
- A track record of growing profits and a stable or rising profit margin
The following’s a table showing CapitaLand’s revenue, profit, and profit margin from 2011 to 2015:
Source: S&P Global Market Intelligence
There are a few observations we can draw. Firstly, CapitaLand has managed to grow its revenue steadily for the timeframe under study. Secondly, the same unfortunately cannot be said about the company’s net profit and hence, its profit margin.
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 first is something we have just studied. As for the second and third, it turns out that:
- CapitaLand has managed to generate enough free cash flow over the past five years to cover its dividends paid over the same period; and
- the company has a reasonably strong balance sheet.
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.