Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) is the largest China-based company in the Singapore stock market. It is also a leading shipbuilder in China in terms of manufacturing capability and capacity.
Shares in the company closed Thursday at S$0.90 apiece. At that price, Yangzijiang has a high dividend yield of 5%. In contrast, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which can be taken as a proxy for the local stock market, had a yield of just 3% on 28 June 2018.
With such a high dividend yield, a question naturally arises: Is Yangzijiang’s dividend sustainable going forward?
To find out, we can look at Yangzijiang’s free cash flow and dividend payout ratio. By “sustainable,” I mean that the company’s dividends can be paid from the cash generated from its daily operations, and not from its accumulated cash balance over the years.
The table below shows a summary of some of the key figures from Yangzijiang’s past few financial years (its financial year ends on 31 December each year):Source: S&P Global Market Intelligence and Yangzijiang’s 2017 annual report
It can be seen that Yangzijiang’s free cash flow had declined from RMB 8.5 billion in 2014 to RMB 1.5 billion in 2017. With lower free cash flow, the company’s dividend had also fallen from 5.5 Singapore cents per share to 4.5 Singapore cents per share over the same time frame. Generally, the more free cash flow a company can generate, the higher the company’s chances of hiking its dividend. The reverse is also true – if a company’s free cash flow shrinks, its chances of lowering its dividend increases.
Now, let’s turn our attention to Yangzijiang’s dividend payout ratio. The dividend payout ratio measures the percentage of a company’s earnings that are paid out yearly as a dividend.
The shipbuilder paid out 29% of its earnings as a dividend in 2017. Given its low payout ratio, it has room to pay a higher dividend. Also, the company’s total dividend of 4.5 cents in 2017 was only around 57% of its free cash flow for the year.
The Foolish takeaway
Yangzijiang’s dividend had declined from 5.5 Singapore cents per share in 2014 to 4.5 Singapore cents per share in 2017, in line with its falling free cash flow. If we go strictly with the theory that rising dividends can only be supported by higher free cash flow, then Yangzijiang’s business has to improve to at least sustain its dividend.
If Yangzijiang’s management wants to keep shareholders happy despite its falling free cash flow, it could still afford to maintain its 2017 dividend of 4.5 Singapore cents, given its low payout ratio. If I were a shareholder, I would prefer the company’s free cash flow to able to support any dividend that’s paid.
As seen from the general trend in the table above, I think that Yangzijiang’s management would prefer to lower the dividend if the company’s free cash flow is falling and there’s no improvement in sentiment in the shipbuilding industry (note that 2017 dividend improved year-on-year despite much lower free cash flow for the year versus 2016’s).
Sentiment in the shipbuilding market could be turning positive, and hence the higher dividend for 2017. In the Yangzijiang’s annual report for the year, its executive chairman, Ren Yuanlin, commented:
“The Baltic Dry Index reached a 3-year high, reflecting strong underlying demand for dry bulk carriers. … New orders secured by PRC shipyards increased by about 60% year-on-year (yoy) to about 33 million tons.”
If Yangzijiang’s business indeed improves, which translates to higher free cash flow, it is highly likely that the company’s dividend can 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.