What Does Singapore Post Limited’s Profit 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 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 Singapore Post’s revenue, net profit, and net profit margin from FY 2011/2012 to FY 2015/2016:

Singapore Post income statement table
Source: Singapore Post’s financial statements

There are a few observations we can draw from the data we have here.

Firstly, Singapore Post has managed to grow its revenue in each year for the timeframe under study. The growth there has also been impressive.

Secondly, the company’s net profit margin has been volatile. Moreover, the improvement in margin seen in FY 2015/2016 was mainly due to non-recurring gains. In the absence of such a gain, Singapore Post’s net profit, and thus its net profit margin, would have declined during the year.

So, in terms of the company’s profit history, we can see that Singapore Post’s revenue has been increasing quickly, but at the expense of its profit margins. The company has been expanding into lower-margin logistics and eCommerce-related businesses and has also been acquiring companies heavily. The benefits to the bottom-line with its acquisitions are yet to be seen.

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

1) Singapore Post’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.

2) The company has a reasonably strong balance sheet.

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