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Is Singapore Technologies Engineering Ltd’s Dividend Safe?

Engineering conglomerate Singapore Technologies Engineering Ltd (SGX: S63) released its 2016 full year earnings in the middle of February. The company’s dividend for the year was S$0.15 per share, unchanged from 2015.

Some investors may be wondering: Is Singapore Technologies Engineering’s dividend safe? Let’s look at three charts that I think can provide some insight on the question.

Chat 1 is the first chart here and it plots the company’s total dividend per share (consisting of ordinary and special dividends) from 2006 to 2016.

There’s one positive takeaway from the chart: Singapore Technologies has managed to pay an annual dividend for the period under observation and has also kept its pay-out within a reasonably tight range of between S$0.1328 per share and S$0.1688 per share. This is impressive considering we had the Great Financial Crisis in 2008 and 2009.

Chart 1 - Singapore Technologies Engineering's total dividend (ordinary + special) per share from 2006 to 2016
Source: S&P Global Market Intelligence

Next, we have Chart 2, which shows the engineering conglomerate’s operating cash flow per share, free cash flow per share, and dividend per share for the same period as Chart 1.

Ultimately, dividends are paid by a company with cash. And, that cash can be obtained by the company though a few means, such as (a) borrowing from banks and/or investors, (b) issuing new shares to investors, (c) selling assets, and (d) simply collecting the cash generated from its businesses.

Options (a) through (c) are not sustainable over the long run, thus leaving us with Option (d). This is why it is important to watch a company’s free cash flows. It is the actual cash flow from a company (known as operating cash flow) that is left after the firm has spent the capital necessary to maintain its businesses at their current states. The more free cash flow a company can produce in the future, the higher its chances of being able to dish out fatter dividends in the years ahead.

As Chart 2 shows, Singapore Technologies Engineering has been adept at generating operating cash flow and free cash flow over the past decade. Another point worth noting from the chart is that the company’s free cash flow in 2016 adequately covers its dividend. The only snag here is that there’s no discernible growth-trend when it comes to Singapore Technologies Engineering’s free cash flow.

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

Chart 3 is the last chart we’re looking at. It illustrates Singapore Technologies Engineering’s net-cash position from 2006 to 2016, where net-cash refers to cash and short-term investments minus total borrowings and capital leases.

Guarantees are not attached to dividends. A company with a weak balance sheet (one that is laden with debt) can easily reduce or eliminate its dividend if its business deteriorates so as to meet creditors’ demands or safeguard its financial health.

In the case of Singapore Technologies Engineering, it has mostly been in a net-cash position for the period we’re studying. At the end of 2016, the engineering conglomerate recorded a small net-cash position.

Chart 3 - Singapore Technologies Engineering's net-cash position from 2006 to 2016
Source: S&P Global Market Intelligence

Based on Charts 1 to 3, Singapore Technologies Engineering has (a) a good long-term track record of paying a consistent dividend, (b) a solid historical ability to generate operating cash flow and free cash flow, and (c) a reasonably sturdy balance sheet. These traits suggest that Singapore Technologies Engineering’s dividend is in pretty safe hands.

But, it’s also important to note that a careful consideration of the company’s future prospects – something I did not do above – is needed before any firm investing conclusion can reached. Take the information seen here simply as a useful starting point for further research.

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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 doesn't own shares in any companies mentioned.