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Want Sustainable Dividends? You Need To Check These 2 Numbers

Over two years ago, in July 2015, I wrote an article on Keppel Corporation Limited (SGX: BN4) titled Is Keppel Corporation Limited’s 5.9% Dividend Yield Sustainable?

In my July 2015 article, I pulled out Keppel Corp’s financials from 2004 to 2014 and studied three things: (1) The company’s track record in growing and paying a dividend; (2) the company’s ability to grow its free cash flow over time, and generate more free cash flow than the dividends paid; and (3) the strength of the company’s balance sheet.

I found that the oil rig builder and property developer had a poor track record in generating positive free cash flow after 2008, and that its balance sheet at end-2014 had more debt than cash. Because of my findings, I wrote in my article that “investors might need to be aware of the risk that the conglomerate may not be able to sustain its dividends in the future.”

Turns out, Keppel Corp did slash its dividends eventually. In 2014, the conglomerate’s dividend was S$0.48 per share. In 2015 and 2016, the dividend fell to S$0.34 and S$0.20, respectively. Those are significant declines.

Keppel Corp’s experience is an important reminder that investors need to check two numbers when assessing the sustainability of a company’s dividend: (1) The company’s free cash flow; and (2) its debt level. If you find a company with a chronic inability to generate free cash flow and a high level of debt in relation to cash, you should be worried about its future dividends.

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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 writer Chong Ser Jing owns shares in Keppel Corporation.