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

Credit: Simon Cunningham

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 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 Keppel Corp’s revenue, net profit, and net profit margin from 2012 to 2016:

Keppel Corp revenue and net profit table
Source: Keppel Corp’s financial statements

We can draw a few observations from the table above.

Firstly, Keppel Corp’s revenue has declined by 52% since 2012, mainly due to the challenging business environment found in the oil and gas industry over the past few years as a result of the sharp fall in oil prices.

Secondly, the company’s net profit and net profit margin has followed the same trajectory as its revenue for the timeframe under study. The former has fallen by 65% from S$2.24 billion to S$784 million while the latter has slid from 16.0% to 11.6%.

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. Keppel Corp has been paying out more in dividends than it has been generating in free cash flow.
  2. The company has a sizeable cash hoard of $2.36 billion, and it has important debt-related ratios that are at acceptable levels.

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

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 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.