ComfortDelGro Has Grown Its Dividends For 5 Consecutive Years, But Can They Be Sustained?

The potential for dividend growth is one of the essential criteria I look for when investing in dividend stocks. ComfortDelGro Corporation Ltd (SGX:C52) has done well in that regard, increasing its dividend for five consecutive years.

Dividends from 2013 to 2017 have grown at a compounded rate of 8.3% per year, from 7.0 Singapore cents per share in 2013 to 10.4 Singapore cents per share in 2017.

However, the past may not always reflect the future. Besides its history, there are other aspects to consider when assessing if a company has the potential to continue increasing dividends in the future.

With that, here are some things to look out for when evaluating if ComfortDelGro can continue delivering dividend growth.

Declining taxi business

As most of us know, ComfortDelGro has faced disruption from ride-sharing apps such as Grab and Uber. Consequently, its taxi business has suffered. In 2017, for example, revenue from its taxi business declined S$124.8 million or 9.8% from a year ago.

As taxi services contribute slightly more than 30% of the group’s total revenue, declines in this segment will have a significant impact on its bottom line.

Moreover, the decline in its taxi business does not seem to be slowing down. In the first quarter of 2018, revenue from its taxi business plunged another S$31.5 million or a whopping 14.8% from a year ago. This decrease in its taxi business was one of the factors that has led to a lower operating profit during the quarter.

Dividend growth in recent years not supported by earnings growth

Investors often take the raw headline numbers when judging how well a company has done. It may seem that just because ComfortDelGro is paying more dividends to shareholders, the company has performed well over the recent few years.

However, this could not be further from the truth. In fact, ComfortDelGro’s earnings per share has somewhat fluctuated between 2013 and 2017, only growing by a total of 12.5% during that time. However, over the same time frame, the company increased its dividend per share by 42.8%. This was artificially supported by increasing its dividend payout ratio from 56.4% to 74.6%.

Increasing its dividend payout ratio is an unsustainable way of growing its dividend. Ideally, dividend growth should be supported by improving business earnings. Only then can dividend growth be consistent over the longer term.

The Foolish bottom line

As of March 2018, ComfortDelGro had a net cash position of S$297.6 million, and the company managed to generate positive operating cash flow. It also has a dividend payout ratio that is still below 80%.

That said, its taxi business continues to face downward pressure from disruptive technology. Also, its dividend growth has been artificially supported by higher dividend payout ratios, rather than underlying earnings growth. As such, I do not believe that the recent dividend growth can continue for much longer.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.