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…
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 ComfortDelGro Corporation Ltd’s (SGX: C52) dividends are sustainable. The firm closed at S$1.91 per share for the day with a trailing dividend yield of 5.4%.
The table below shows a summary of some of the key figures from ComfortDelGro’s past few financial years (its financial year ends on 31 December):
|Free Cash Flow
|Dividend Payout Ratio||0.54||0.56||0.62||0.64||0.70|
|Total Dividends Paid Per Share (cents)||6.40||7.00||8.25||9.00||10.30|
Source: ComfortDelGro’s Annual Reports
It can be seen from the table above that free cash flow had improved from S$203.2 million in FY2012 to S$314.2 million in FY2016, although not on a consistent basis.
With the uptick in free cash flow, the total dividends paid per share had grown from 6.40 cents to 10.30 cents during the same time frame. Usually, 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.
The dividend payout ratio is calculated by taking the earnings per share divided by the dividend per share. This ratio shows the percentage of a company’s earnings that are paid out yearly as a dividend.
Generally, if a company has a high payout ratio, it might not be able to continue paying out the same dividend if profits drop in the future. Also, a ratio of above one indicates that the company is paying out more in dividends than it gets in net income, which is unsustainable.
The dividend payout ratio had increased from 0.54 in FY2012 to 0.70 in FY2016 but is still below one.
ComfortDelGro had an annualised free cash flow of S$259.7 million for 2017 based on the numbers for the first nine months of the year. If we recall, the company had been affected financially during the recent quarters due to strong competition, especially in its taxi business.
If we assume that its dividend per share for 2017 would be the same 10.30 cents per share as 2016’s, the company would pay out a total of S$222.8 million in cash as dividends. This translates to a hypothetical payout ratio of 0.86 using the annualised free cash flow for 2017. This is not a high figure as well.
In conclusion, with free cash flow being more than the dividends paid and a comfortable dividend payout ratio, dividends from ComfortDelGro look likely to be sustained.
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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 contributor Sudhan P doesn’t own shares in any companies mentioned.