MENU

What Does Singapore Technologies Engineering Ltd’s Profits 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 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 ST Engineering’s revenue, net profit, and net profit margin from 2011 to 2015:

st-engineering-revenue-profit-profit-margin-table
Source: ST Engineering 2015 annual report

There are a few observations we can draw from the table above.

Firstly, the company has managed to grow its revenue for the timeframe under study. There was steady growth from 2011 to 2013, before some of it was given back in the following two years.

Secondly, ST Engineering’s profit in 2015 is basically unchanged from that of 2011 despite the slightly higher revenue. This has resulted in the company’s net profit margin dipping by a little. That being said, the company did not suffer from any large declines in profit in the five years we’re looking at; the largest profit decline occurred in 2014 and it was ‘only’ a 8.4% dip. The profit margin has also remained in a tight range of between 8.1% and 9.0%.

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. ST Engineering has seen its free cash flow fall steadily over the past few years. Its free cash flows have also not been able to cover its dividends in three of the five years from 2011 to 2015.
  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 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, 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.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.