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Is Keppel Corporation Limited’s Dividend Safe?

Credit: Simon Cunningham

In late January, property development and marine engineering conglomerate Keppel Corporation Limited (SGX: BN4) released its earnings for the fourth quarter of 2016 and announced a final dividend of S$0.12 per share.

With that, the company’s total dividend for 2016 was brought to S$0.20 per share, representing a significant 41% reduction from 2015’s dividend of S$0.34 per share, which was itself already 30% lower than 2014’s dividend of S$0.48 per share.

This series of dividend cuts raises a big question: How safe is Keppel Corporation’s dividend?

Let’s look at three charts that I think can give investors important insight into the safety of the company’s dividend.

Chart 1 is the first chart I have and it illustrates Keppel Corporation’s ordinary dividend over the past decade from 2006 to 2016. There are two things to note.

Firstly, the conglomerate has a history of paying an annual dividend in each year for the timeframe under study, even throughout the Great Financial Crisis of 2008-09 – this is a good thing to see.

Secondly, while the company has managed to consistently grow its dividend from 2006 to 2013, it has really struggled with maintaining its dividend in more recent years as I had mentioned earlier, so much so that its dividend is now lower than in 2008 – that’s clearly not a positive trait.

Chart 1 - Keppel Corporation's ordinary dividend from 2006 to 2016
Source: S&P Global Market Intelligence

The next chart would be Chart 2, which plots Keppel Corporation’s operating cash flow per share, free cash flow per share, and dividends per share for the same period as Chart 1.

Dividends are ultimately paid with cash and that cash can be obtained by a company in a variety of ways, such as (a) borrowing from banks and/or investors, (b) issuing new shares to investors, (c) selling assets, and (d) collecting the cash generated from its businesses.

Options (a) to (c) are not sustainable over the long-run, which leaves us with the fourth option. This is why it is important to watch a company’s free cash flows. It is the actual cash flow from a company’s business that’s left after the firm has spent the capital necessary to maintain its businesses at their current states. The more free cash flows a company can produce in the years ahead, the higher the potential for fatter dividends in the future.

The picture painted in Chart 2 is disappointing. Keppel Corporation has failed to produce positive operating cash flow with any form of consistency from 2006 to 2016, resulting in erratic free cash flow. Although 2016’s free cash flow is a big improvement over 2015’s, it is still negative and it remains to be seen if the improvement can be maintained.

Chart 2 - Keppel Corporation's total dividend, operating cash flow, and free cash flow per share from 2006 to 2016
Source: S&P Global Market Intelligence

Chart 3 would be the last chart here and it shows Keppel Corporation’s net-debt (total borrowings and capital leases minus cash and short-term investments) to equity ratio from 2006 to 2016.

There are no guarantees when it comes to dividends. So, if a company has a weak balance sheet, its dividend can easily be reduced or eliminated in the event of any deterioration in its business environment so as to meet demands from creditors or to protect its financial position.

In Chart 3, we can see that Keppel Corporation’s net-debt to equity ratio in 2016 is only slightly lower than 2015’s 55%, which is a 10-year high.

Management has publicly commented that Keppel Corporation has plenty of capacity to increase its borrowings, suggesting that the company’s balance sheet is still healthy. But, a net-debt to equity ratio of 54.8% at end-2016 is not exactly low. Moreover, the company’s net-debt position of S$6.76 billion is a significant sum.

Chart 3 - Keppel Corporation's net-debt to equity ratio from 2006 to 2016
Source: S&P Global Market Intelligence

Putting together what we’ve seen with Charts 1 to 3, from 2006 to 2016, Keppel Corporation has (1) not managed to pay a steady dividend, (2) failed to produce operating cash flow and free cash flow in a consistent manner, and (3) a significant net-debt position and a net-debt to equity ratio that is not low.

Based on the three charts alone, Keppel Corporation’s dividend does not look particularly safe to me, given the risks involved. But, it’s also important to carefully consider the prospects of the company’s business – something I did not do – before any firm investment decision can be made.

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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 writer Chong Ser Jing owns shares in Keppel Corporation.