Haw Par Corporation Ltd (SGX: H02) is the maker of the Tiger Balm brand of ointment. Other than its healthcare arm, it also has strategic stakes in UOL Group Limited (SGX: U14) and United Overseas Bank Ltd (SGX: U11).
At Haw Par’s share price of S$12.57 currently, the company has a trailing dividend yield of 2.0%, which is low for income investors. Is there room for the company to increase its dividends in the coming years? Let’s find out by using Haw Par’s free cash flow figures and other metrics.
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A company’s free cash flow shows how much cash the firm has to pay out dividends to shareholders, buy back shares, make acquisitions, or strengthen its balance sheet. To calculate a company’s free cash flow, we can take its operating cash flow (typically given as “Net cash provided by operating activities” within a company’s Consolidated Statement of Cash Flows) and deduct its capital expenditure (typically given as “Purchase of property, plant and equipment” from the same financial statement).
The following table shows some key cash flow and dividend metrics for Haw Par from 2013 to 2017:
Source: S&P Global Market Intelligence
You can see that Haw Par had been paying out around 50% of its free cash flow as common dividends, on average, in each year for the period we’re studying. The company’s common dividend excludes any special dividend; Haw Par paid a special dividend of S$0.15 per share in 2015.
Haw Par’s dividend payout ratio has hovered below 45% over the past five years. The dividend payout ratio is found by dividing Haw Par’s common dividend by its earnings. So, from 2013 to 2017, Haw Par had been paying less than 45% of its earnings as dividends.
As of 30 September 2018, Haw Par had a formidable balance sheet with S$494.1 million in cash and just S$23.1 million in borrowings. Over the last 12 months, the company also produced S$116.2 million in free cash flow.
All the above could give you clues as to where my conclusion is heading.
The Foolish takeaway
Haw Par has a huge cash pile, and it runs businesses that ensures its cash does not run out. With a strong ability to generate free cash flow, very little debt, and paying dividends that are well below its earnings and free cash flows, it looks to me like Haw Par can afford to increase its dividend from the current level of S$0.20 per share.
Even if the company were to double its 2017 dividend of S$0.20 per share and pay a dividend of S$0.40 per share, it would come up to only S$88 million based on its current share count. This S$88 million is less than Haw Par’s free cash flow over the last 12 months. With a dividend of S$0.40 per share, Haw Par would have a dividend yield of 3.2% at its current share price of S$12.57.
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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 United Overseas Bank Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.