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What Does Straco Corporation Ltd’s Profits 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 first point. For the second and the third, you can check out here and here, respectively.

Profit history

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:

  1. A track record of steady revenue growth
  2. A track record of growing profits and a stable or rising profit margin

The following’s a table showing Straco’s revenue, net profit, and net profit margin from 2011 to 2015:

straco-revenue-and-profit-table
Source: S&P Global Market Intelligence

There are a few observations we can draw.

Firstly, Straco has managed to show substantial and consistent revenue growth for the timeframe under study. Secondly, the company has managed to show strong profit growth as well as consistently high net profit margins of above 35%.

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:

  1. Straco 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; 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 free cash flow and balance sheet strength. Here they are again for convenience: free cash flow 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.