What Does Keppel Corporation Limited’s Balance Sheet Say About Its Dividend?

Keppel Corporation Limited (SGX: BN4) is one of the Singapore stock market’s largest conglomerates. It has four major business segments, namely, Offshore and Marine, Property, Infrastructure, and Investment.

The company has a track record of paying an annual dividend that goes back to at least 1989. But, the company’s dividend has been under pressure in the past two years; in 2014, 2015, and 2016, Keppel Corp’s dividend per share came in at S$0.48, S$0.34, and S$0.20 respectively.

The conglomerate’s falling dividends may raise an important question in investors’ minds: Is the current dividend sustainable?

Unfortunately, there is no easy answer. That said, 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.

Keppel Corp currently has (latest financials as of 31 December 2016) a cash balance of S$2.36 billion. It also has debt and shareholders’ equity of S$9.05 billion and S$11.66 billion, respectively, giving rise to a debt to shareholders’ equity ratio of 78%. The ratio is at an acceptable level since it is less than 100%.

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. Keppel Corp has a history of revenue, profit, and profit margin declines.
  2. Keppel Corp has been paying out more in dividends than it has been generating in cash flow.

(I had earlier shared the links for the analyses of Keppel Corp’s profit history and free cash flow. Here they are again for convenience: profit history and free cash flow.)

In sum, despite the negatives seen with Keppel Corp (lack of sustainable profits and a poor ability to generate free cash flow), the company’s cash hoard gives it the resources to pay out a dividend at the current rate for the next two to three years at least. (The cash hoard of S$2.36 billion is a few times larger than the dividend of S$545 million Keppel Corp paid in 2016.)

But, this rests on the important assumption that there is no further substantial deterioration in the company’s business environment over the next few years. Investors will have to pay attention for signs of any future improvement in free cash flow – as mentioned, Keppel Corp has been paying a dividend that’s not within its means, so the company has to grow in its free cash flow in the long run.

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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.