What Does Dairy Farm International Holdings Ltd’s Profit 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 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 Dairy Farm’s revenue, net profit, and net profit margin from 2012 to 2016:

Source: Dairy Farm’s financial statements

From the table above, we can see that Dairy Farm’s revenue growth rates have slowed over the timeframe under study, from a high of 7.3% in 2012 to a low of just 0.6% in 2016.

The company’s net profit margin has also declined from 4.6% to 4.2% in that period. But, the company did manage to grow its profit by 5% from 2012 to 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 first is something we have just studied. As for the second and third, it turns out that:

1) Dairy Farm is a company that has been paying more in dividends than it has generated in free cash flow in recent years.

2) The company has a reasonably healthy balance sheet.

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

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.