MENU

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

Sarine Technologies net profit table
Source: Sarine Technologies annual reports

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

Firstly, Sarine Technologies managed to grow its revenue in each year from 2011 to 2014, before losing almost half of its revenue in 2015. Secondly, its net profit was growing, and its net profit margin stable, in the first four of the five years under study; but, 2015 saw both metrics collapse significantly.

When we put the two points together, we can see that Sarine Technologies’ business can be volatile. This is despite the fact that the company has a market share of 70% for the products and services it is selling.

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. Sarine Technologies has paid a dividend that’s within its means.
  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’ 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, 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.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and 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.