What Does Hour Glass Ltd’s Balance Sheet Tell Investors About Its Dividend?

Hour Glass Ltd (SGX: AGS) is a retailer of luxury watches with over 40 boutiques scattered across six regions in Asia Pacific, namely, Singapore, Australia, Hong Kong, Thailand, Japan, and Malaysia.

The company carries over 50 high end watch brands in its boutiques, some of which are Audemars Piguet, Patek Philippe, Richard Mille, and IWC Schaffhausen.

One trait about Hour Glass that may appeal to income investors is its long track record of paying an annual dividend. It’s a record that has extended for more than 10 years.

But that is then and this is now. Just how sustainable is Hour Glass’s dividend? 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 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.

Hour Glass currently has (latest financials as of 31 December 2016) a cash balance of S$95.1 million. It also has total debt of S$55.4 million and shareholders’ equity of S$460.6 million, which give rise to a debt to shareholders’ equity ratio of 12.0%.

With the numbers we’ve just seen, Hour Glass ticks the right boxes here – it has a high cash balance and a low debt to shareholders’ equity ratio. In other words, the luxury watch retailer has a strong balance sheet.

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 Hour Glass. As for the first and second, it turns out that:

1) Hour Glass’s profit has declined over the past few years despite revenue having grown, due to declining profit margins.

2) The company has been paying more in dividends than it has generated in free cash flow over its last five fiscal years. But, it has also been investing to grow its business, so it’s not too worrying despite the fact it has been paying a dividend that is above its means.

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

In sum, despite the company’s declining profit margins, it has a decent track record with generating free cash flow and a strong balance sheet. This results in a high probability that Hour Glass can sustain its dividend.

But with everything being said, do also bear in mind that there are other important aspects about the stock to investigate, as I had mentioned earlier, when it comes to assessing the sustainability of its dividend.

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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.