What Does Dairy Farm International Holdings Ltd’s Balance Sheet Tell Investors About Its Dividend?

Dairy Farm International Holdings Ltd (SGX: D01) is a Pan-Asian bricks-and-mortar retail company that runs a wide variety of retail formats, including supermarkets, hypermarkets, convenience stores, pharmacies, home furnishing stores, and restaurants. It currently has over 6,500 outlets.

In Singapore, retail stores that are under Dairy Farm include GuardianCold StorageGiant, and 7-Eleven.

The company has a long-term track record of paying an annual dividend that stretches back to at least a decade. But that is then and this is now. Can Dairy Farm sustain or grow its dividend? The question gains importance when we consider that the bricks-and-mortar retail industry has been facing a challenging time these past few years due to the growth of online retail.

Unfortunately, there is no easy answer to the question. But, there are still some things about Dairy Farm’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 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.

Dairy Farm currently has (latest financials as of 31 December 2016) a healthy cash balance of US$323.8 million. It also has total debt of US$964.6 million, which gives rise to an acceptable total debt to shareholders’ equity ratio of 64%.

A Foolish conclusion

Earlier in this article, I had shared three things about a company’s business that investors could look at to give them clues on how sustainable the company’s dividend is. The third is something we have just studied for Dairy Farm. As for the first and second, it turns out that:

1) Dairy Farm has been solidly profitable from 2012 to 2016, but the company has struggled to grow its bottom-line.

2) The company has been paying more in dividends than it has generated in free cash flow in recent years.

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

In summary, Dairy Farm is a pan-Asia retailer that has been unable to grow its profit by much and that has seen its free cash flow deteriorate in recent years. But, given its reasonably strong balance sheet, Dairy Farm should still be able to sustain its current dividend over the next two to three years. Over the longer term,   the ability of Dairy Farm to sustain its dividends will depend on how well it can cope with the challenges from online retail.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Dairy Farm International Holdings. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.