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What Does Straco Corporation Ltd’s Balance Sheet Say About The Sustainability Of Its Dividend?

Straco Corporation Ltd (SGX: S85) is a tourism asset operator with operations in both China and Singapore. In China, the company owns aquariums and a cable car attraction; in Singapore, the company’s the majority owner of the iconic Singapore Flyer.

Straco was listed in 2004 and first paid a dividend in 2006. Since then, the company has consistently paid an annual dividend and has also grown its pay-outs at a solid clip. To the point, Straco’s dividend in 2015 was 2.0 cents per share, an eight-fold jump from the 0.25 cents seen in 2006.

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 third point. For the first and the second, you can check out here and here, respectively.

Balance sheet strength

Dividends are paid out to investors in the form of cash.

In other words, a company must have enough cash in 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.

Straco currently has a cash balance of S$159.6 million and a debt to shareholders’ equity ratio of 28%. That’s a strong balance sheet, especially when we consider the fact that Straco’s total debt of S$64.9 million is way lower than its aforementioned cash balance.

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:

  1. Straco has displayed strong profit growth over the past five years; and
  2. The company has managed to generate growing free cash flow over the past five years, plus the free cash flow has also adequately covered its dividends paid over the same period.

(I had earlier shared the links for the analyses of Straco’s profit history and free cash flow. Here they are again for convenience: profit history and free cash flow.)

So if I put the three things together, Straco is a company that has (1) a history of strong profit growth, (2) paid a dividend that’s well within its means, and (3) a strong balance sheet with way more cash than debt.

But, do bear in mind that there are other important aspects about a stock to investigate, as I had mentioned earlier, 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.