Could Dairy Farm International Holdings Ltd Be a Better Dividend Share Than StarHub Ltd?

Dairy Farm International Holdings Ltd (SGX: D01) has replaced StarHub Ltd (SGX: CC3) on the Straits Times Index (SGX: ^STI).

Even though StarHub is well-known to be a high dividend-yielder, is it a better dividend share overall compared to Dairy Farm? Let’s find out by assessing the dividend growth rate and dividend payout ratio of the two companies.

Dividend yield

On Friday, Dairy Farm closed at US$9.30 per share, giving a trailing dividend yield of 2.2%.

On the other hand, StarHub last exchanged hands on Friday at S$1.67 per share, translating to a trailing dividend yield of 9.6%.

Looking at the dividend yield alone, StarHub appears to have the edge over Dairy Farm. But this metric does not show a full picture of a company’s dividend sustainability. The next two factors will reveal more.

Dividend growth rate

The dividend growth rate shows much much a firm’s dividends have grown over the past few years.

In 2013, Dairy Farm’s total dividend was 23 US cents. The dividend has come down to 21 US cents in 2017. The following chart shows the dividend payment trend over the last five years:

Source: Dairy Farm International Holdings Ltd 2017 annual report

As for StarHub, its dividends, too, had been reduced from 20 Singapore cents per share to 16 Singapore cents during the same time frame.

Even though dividends from both companies have fallen over the years, Dairy Farm is lesser of the two evils as its dividends had declined by a smaller rate.

Dividend payout ratio

Beyond the trailing dividend yield, we should also look at whether the companies can afford to pay the same dividend in the future at least. To do that, we can compare its free cash flow to the amount in dividends that it pays out.

I prefer companies which keep their dividend payout ratio below 100% as that leaves some room for dividend increases in the future.

In 2017, Dairy Farm’s free cash flow was US$452.9 million. It paid out US$284 million in dividends for the year. This translates to a dividend payout ratio in terms of free cash flow to be 63%.

In comparison, StarHub’s free cash flow was S$221.3 million in 2017. For the year, it dished out S$276.6 million in dividends. In terms of free cash flow, it paid out more than 100% of it as dividends.

Dairy Farm, with its conservative dividend payout ratio, can increase its dividends in the future even with stagnant free cash flow. However, StarHub does not have the leeway to do that.

The Foolish takeaway

StarHub has a much higher dividend yield than Dairy Farm. However, that by itself tells us nothing about its dividend sustainability. With a less steep drop in dividends and a lower dividend payout ratio, overall, Dairy Farm looks to be the better dividend share than StarHub to me.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Dairy Farm International Holdings Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.