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Are Dividends from Kingsmen Creatives Ltd Sustainable?

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, 5%, may or may not be able to sustain the 5% 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 Kingsmen Creatives Ltd’s (SGX: 5MZ) dividends are sustainable. Currently, the firm is going at S$0.61 per share and has a dividend yield of around 4%. To put things into perspective, STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX: ^STI), yields 2.9%.

The table below shows a summary of some of the key figures from Kingsmen’s past few financial years (its financial year ends on 31 December):

Source: Kingsmen Creatives Ltd’s Annual Reports

Free cash flow is the amount of money left after acquiring or maintaining fixed assets, such as land, buildings, and equipment. The amount can then be used to dish out dividends to shareholders.

As seen from the table above, free cash flow had declined from S$28.3 million in FY2012 to S$11.6 million in FY2016. Especially in FY2015 and FY2016, the firm had been facing headwinds mainly from the slowdown in the luxury retail sector. The free cash flow figure in FY2015 was negative due to acquisition of a new factory unit in Malaysia.

Along with the decline in free cash flow, total dividends per share had declined from 4.0 cents in FY2012 to 2.5 cents in FY2016.

Now, let’s turn our attention to the dividend payout ratio. It tells investors what percentage of a company’s earnings are paid out yearly as a dividend.

The ratio had declined slightly from 0.45 in FY2012 to 0.42 in FY2016. With headwinds potentially continuing for Kingsmen in the near-term, its management team was most probably conservative and wanted to conserve cash. This might explain the decrease in payout ratio, particularly in FY2015.

In conclusion, there is a possibility that dividends at Kingsmen may be cut further if the luxury retail sector downturn is protracted, free cash flow continues to decline and if payout ratio is kept to around 40%. Management can choose to increase the payout ratio just to maintain its dividends, but that might not be a prudent move.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.