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What Does Sarine Technologies Ltd’s Free Cash Flow Say About Its Dividend?

Sarine Technologies Ltd (SGX: U77) is an Israel-based company that develops and manufactures precision technology products that are used in the processing of rough diamonds and gemstones into the polished versions you see in jewellery stores.

The company been a long-term market beater. Over the last 10 years, its stock price is up 303% while the Straits Times Index (SGX: ^STI) has actually declined by 3%. But that’s not all – Sarine Technologies has also been paying an annual dividend over its last 10 fiscal years.

This begs the question: Just how sustainable is Sarine Technologies’ 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 Sarine Technologies’ free cash flow and dividends paid have changed from 2011 to 2015:

Sarine Technologies free cash flow chart
Source: Sarine Technologies’ annual reports (2011 to 2015)

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

Sarine Technologies free cash flow table
Source: Sarine Technologies’ annual reports (2011 to 2015)

From the table above, we can see that with the exception of 2013 and 2015, Sarine Technologies’ free cash flow has exceeded its dividends paid.

All told, from 2011 to 2015, Sarine Technologies has paid around US$69.5 million in dividends whilst generating US$74.4 million 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. Sarine Technologies has volatile revenue and profits
  2. The company has a strong balance sheet with US$34.9 million in cash and zero debt.

(I had earlier shared the links for the analyses of Sarine Technologies’ 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, Sarine Technologies is a company that has (1) a history of volatile revenues and profits, (2) a track record of paying dividends within its means, and (3) a strong balance sheet. Investors in the company should be comfortable with the volatile nature of Sarine Technologies’ business, which may occasionally lead to a cut in its dividend during a downturn.

With everything being said, 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.