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What Does Singapore Post Limited’s Free Cash Flow Tell Investors About Its Dividend?

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 second point. For the first and the third, you can check out here and here, respectively.

Free cash flow

For a company to be able to sustain its dividend payments, it must be able to generate cash to pay its bills and maintain its businesses at their current state. Left over cash can then be used to pay out dividends.

In the financial community, that left-over cash is known as free cash flow and it is found by subtracting a company’s capital expenditure from its cash flow from operations. It is not sustainable over the long-term for a company to pay out more in dividends as compared to the free cash flow it generates.

Here’s a table showing how Singapore Post’s free cash flow and dividends paid have changed from FY 2011/2012 to FY 2015/2016:

Singapore Post free cash flow table
Source: Singapore Post’s financial statements

Turns out, Singapore Post has mostly been paying a dividend that’s higher than the free cash flows it has generated; in particular, there was a gap of S$522 million between the company’s free cash flow and dividends paid in FY 2015/2016.

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 second is something we have just studied for Singapore Post. As for the first and third, 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 has a reasonably strong balance sheet.

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

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 appear 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.