What Does Singapore Post Limited’s Balance Sheet Tell Investors About Its Dividend?

Credit: Simon Cunningham

Singapore Post Limited (SGX: S08) is a mail and logistics services provider.

The company had paid a stable dividend of 6.25 cents per share for many years, from its fiscal year ended 31 March 2007 (FY 2006/2007) to FY 2013/2014. In FY 2014/2015 and FY 2015/2016, Singapore Post actually increased its annual dividend to 7.00 cents per share.

FY 2015/2016 was also the year that Singapore Post improved its dividend policy, such that it had an aim to pay a dividend of at least 7 cents per share per year. The previous long-standing policy saw the company “endeavour to pay a minimum annual dividend of 5 cents per share.”

These traits made Singapore Post a favourite amongst dividend investors in Singapore. But in the company’s current fiscal year – FY 2016/2017 – it changed its dividend policy. The dividend will now be one based on a payout ratio of between 60% and 80% of underlying net profit.

The change resulted in a decline in Singapore Post’s interim dividends from 4.5 cents per share in the first three quarters of FY 2015/2016 to just 3.0 cents per share for the same period in FY 2016/2017. With this comes a big question: Is Singapore Post’s 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.

Singapore Post currently has (latest financials as of 31 December 2016) a cash balance of S$229 million. It also has debt of S$415 million and shareholders’ equity of S$1.24 billion, which give rise to a debt to shareholders’ equity ratio of 33.4%.

The company’s debt to shareholders’ equity ratio is reasonably low, and its current cash balance is also higher than the total dividend paid to investors in FY 2015/2016 (a sum of S$167 million).

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 for Singapore Post. As for the first and second, it turns out that:

1) Singapore Post’s profit has fallen over the past few years (excluding non-recurring gains) despite healthy revenue growth.

2) The company’s free cash flow has declined over the years, and descended sharply into negative territory in FY 2015/2016; it has also been paying a dividend that’s mostly beyond its means.

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

In sum, despite Singapore Post’s decent balance sheet, its less-than-ideal profit history and free cash flow picture means its chances of sustaining its dividend appears to be poor.

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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.