The dividend yield of a company tells us nothing about the sustainability of its dividends in the long run. A company that is yielding say, 4%, may or may not be able to sustain the 4% yield the following year, assuming there’s no change in the share price.
To find out if the dividend dished out by a company is sustainable, we have to look at its free cash flow and dividend payout ratio instead. By the word “sustainable,” I mean that the company’s dividends can be paid from the cash generated from daily operations, and not from the accumulated cash balance over the years.
With these in mind, let’s find out if SATS Ltd’s (SGX: S58) dividends are sustainable. Currently, the firm is going at S$5.07 per share and sports a dividend yield of 3.3%.
The table below shows a summary of some of the key figures from SATS’s past few financial years (its financial year ends on 31 March):
Source: SATS Ltd’s Annual Reports
It can be seen from the table above that free cash flow had improved from S$208 million in FY2012-13 to S$221 million in FY2016-17. With the uptick in free cash flow, the total dividend per share had grown from 15 cents to 17 cents. Generally, the more free cash flow that is generated over the years, the higher the chance of a company paying the cash out as dividends to shareholders.
Even though the dividend paid in FY2012-13 (S$288.6 million) was higher than the free cash flow figure for the period (S$208.1 million), the figures have normalised in the subsequent financial years. Do note that due to timing differences, the total dividends paid per share may not translate to the absolute amount of dividends paid out for the year.
Turning our attention to the dividend payout ratio, it had declined from 0.91 in FY2012-13 to 0.74 in FY2016-17. The dividend payout ratio tells investors what percentage of a company’s earnings are paid out yearly as a dividend.
Therefore, with the increasing free cash flow and decreasing dividend payout ratio, the dividends from SATS are highly likely to be sustained going forward.
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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 SATS Ltd.