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This Cash Cow Has a REIT-Like Dividend Yield of 6%

Singapore real estate investment trusts (REITs) have a distribution yield of between 4.8% and 11.4% as of yesterday’s close. Due to the relatively higher yield as compared to the stock market in general, REITs are popular among income investors.

There’s one company in Singapore’s stock market that has a dividend yield that is higher than 10 of the lowest-yielding REITs, with practically zero risk of going bust (since the company has no debt). The company I’m talking about is VICOM Limited (SGX: V01), a leading provider of technical testing and inspection services in Singapore.

At VICOM’s share price of S$6.08 yesterday, the company has a dividend yield of 5.98%, which is also way higher than the 3.5% yield offered by the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the fundamentals of the Straits Times Index (SGX: ^STI).

In this article, let’s find out more about VICOM’s dividends, such as its dividend history, dividend policy, and most importantly, the sustainability of the company’s dividend.

Dividend history

The following chart gives a snapshot of VICOM’s dividends from 2013 to 2017:

Source: VICOM Limited 2017 annual report

VICOM had increased its total dividend (including special dividends) from S$0.225 per share in 2013 to S$0.36 per share in 2017, giving an impressive annual growth rate of 12.5%.

Dividend policy

In the second quarter of 2017, VICOM’s dividend policy was revised to a payout ratio of 90% of net profit, up from a previous ratio of 50%. That’s why the company’s total dividend in 2017 spiked by 35.8% to S$0.36, as seen in the chart earlier.

Dividend sustainability

VICOM’s 2017 total dividend of S$0.36 per share gives a dividend payout ratio of 120%, considering VICOM’s earnings per share was S$0.299 for the year.

With a payout ratio of more than 100%, it shows that VICOM had paid out more in dividends than its earnings in 2017. This could mean that the company does not see a need to hold extra cash on its balance sheet. As of 31 December 2017, VICOM had S$107.5 million in cash and cash equivalents, and no debt. The company’s cash balance dipped to S$97.9 million, as of 30 June 2018, with the higher dividend payment for 2017.

In the 12 months ended 30 June 2018, VICOM had S$27.7 million in free cash flow while the total dividends paid was S$31.9 million. So, the company also paid a dividend that was more than its free cash flow.

Looking the actual payout ratios, VICOM’s dividend does not seem sustainable. However, if management’s intention is to return extra cash to shareholders by consistently increasing the company’s annual dividend (and slowly running down the cash on the balance sheet), income investors might do well owning this cash cow.

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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 VICOM Limited. Motley Fool Singapore contributor Sudhan P owns shares in VICOM Limited.