What Does Singapore Technologies Engineering Ltd’s Free Cash Flow 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 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 how ST Engineering’s free cash flow and dividends paid have changed from 2011 to 2015:

Source: ST Engineering’s annual reports (2011 to 2015)

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

Source: ST Engineering’s annual reports (2011 to 2015)

The chart and table above show that ST Engineering’s free cash flow has been falling over the past few years. In fact, the company’s free cash flow in 2015 had declined by 43% from 2011. Moreover, the company’s free cash flow has not managed to cover its dividends in three of the five years under study.

All told, from 2011 to 2015, ST Engineering paid around S$2.44 billion in dividends whilst generating only S$2.15 billion in free cash flow.

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. ST Engineering has delivered stable profits over the past five years.
  2. The company has a reasonably sound balance sheet with a debt to shareholder’s equity ratio of 53.4%

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