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What Does Straco Corporation Ltd’s Free Cash Flow 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 second point. For the first and the third, you can check out 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.

Here’s a chart showing Straco’s free cash flow and dividends paid from 2011 to 2015:

straco-fcf-and-dividends-paid
Source: Straco’s annual reports (2011 to 2015)

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

straco-free-cash-flow-table
Source: Straco’s annual reports (2011 to 2015)

From the above, we can see that Straco has managed to more than double its free cash flow for the period under study.

The company has also consistently been paying less in dividends than what it has generated in free cash flow. The gap between the company’s dividend and free cash flow is wide too; between 2011 and 2015, the highest dividend-to-free-cash-flow ratio seen was just 43% in 2014.

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. Straco has displayed strong profit growth over the past five years; and
  2. The company has a balance sheet with substantially more cash than debt.

(I had earlier shared the links for the analyses of Straco’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, 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.