What Does Hour Glass Ltd’s Profit 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 first point. For the second and 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 Hour Glass’s revenue, net profit, and net profit margin from its FY2012 (fiscal year ended 31 March 2012) to FY2016:

Hour Glass revenue and net profit table
Source: Hour Glass’s financial statements

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

Although Hour Glass has managed to grow its revenue over the timeframe under study, it has not been able to sustain its profit margins, thereby resulting in a lower profit.

We can see that Hour Glass’s revenue is more stable than its bottom-line. This is primarily due to the significant operating leverage that the company has in its business model – in other words, a small decline in sales volume will have a large impact on its profitability.

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

1) Hour Glass has been paying more in dividends than it has generated in free cash flow over its last five fiscal years. But, the company 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.

2) The company has a strong balance sheet.

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

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.