What Does Singapore Technologies Engineering Ltd’s Balance Sheet Say About Its Dividend?

Singapore Technologies Engineering Ltd (SGX: S63) is an engineering conglomerate with a few major business segments, namely, Aerospace, Electronics, Land Systems, and Marine.

It is one of the Singapore market’s largest stocks with its market capitalisation of over S$10 billion. It’s also a blue chip stock here, given its status as one of the 30 constituents of the Straits Times Index (SGX: ^STI).

Over the last 10 years from 2005 to 2015, ST Engineering has never missed a beat when it comes to paying an annual dividend. Those dividends have also come within a pretty narrow range of S$0.1328 per share to S$0.1688 per share, according to data from S&P Global Market Intelligence. In 2015, ST Enigneering had a dividend of S$0.15.

But that is then and this is now. Just how sustainable is ST Engineering’s 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.

ST Engineering currently has a cash balance (including investments) of S$1.3 billion and a debt to shareholders’ equity ratio of 53.4%. The company’s cash balance is more than twice what it paid in dividends to shareholders in 2015 (S$498 million) while its debt to shareholders’ equity ratio is safely below 100%. These suggest a reasonably strong balance sheet.

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. ST Engineering has delivered stable profits over the past five years.
  2. It has seen its free cash flow fall steadily over the past few years. The company’s free cash flows have also not been able to cover its dividends in three of the five years from 2011 to 2015.

(I had earlier shared the links for the analyses of ST Engineering’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, ST Engineering is a company that has (1) a history of producing steady profits, (2) falling free cash flows, and (3) a reasonably strong balance sheet.

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.