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The Safer Dividend-Paying Share: Riverstone Holdings Limited or Top Glove Corporation Berhad?

Riverstone Holdings Limited (SGX: AP4) and Top Glove Corporation Berhad (SGX: BVA) are both rubber glove makers.

The worldwide rubber glove industry is expected to see continued growth as rubber gloves are vital in medical procedures, some manufacturing processes, and for hygiene’s sake.

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As an investor, I would like to see the companies I own have share prices and dividends that are both increasing over the long-term. Since both Riverstone and Top Glove pay a dividend and could also have rising share prices due to them being exposed to the growing rubber gloves industry, which would be a better dividend payer?

To help answer that, let’s compare the dividend yields, historical dividend growth rates, and dividend payout ratios of the two companies.

Dividend yield

Riverstone’s share price closed at S$1.10 on Wednesday (20 November), giving the company a trailing dividend yield of 2.1%. On the other hand, Top Glove last traded at S$1.88 with a dividend yield of 1.5%.

Based on the dividend yield alone, Riverstone looks like a better dividend share.

Dividend growth rate

The dividend yield tells us what a company has paid over the last 12 months, and it is useful information. However, we should also be looking at how the company’s dividend has changed over time, preferably over the last five years or more.

Riverstone’s dividend climbed by 19.8% annually from 3.4 sen per share in 2013 to 7.0 sen in 2017. As for Top Glove, its dividend per share had risen by 20.7% per year, from 4.0 sen in FY2014 (financial year ended 31 August 2014) to 8.5 sen in FY2018. Do note that the aforementioned dividends of Riverstone and Top Glove are already adjusted for bonus share issues that the two companies have undertaken in the past few years.

So, in terms of dividend growth, Top Glove triumphs over Riverstone.

Dividend payout ratio

Beyond the trailing dividend yield, we should also assess whether a company can maintain or grow its current dividend in the future. To do that, we can compare the company’s free cash flow to the amount in dividend that it pays.

I prefer a company to have a dividend payout ratio (dividend as a percentage of free cash flow) of less than 100% because it leaves some room for any business slowdowns in the future.

In 2017, Riverstone’s free cash flow was RM 34.4 million, and its dividend for the year totalled RM 51.9 million. This translates to a dividend payout ratio of more than 100%. In comparison, Top Glove’s payout ratio is not meaningful, given it had negative free cash flow.

Both companies are expanding for growth, and this has caused them to spend heavily on capital expenditure, leading to depressed free cash flows. Even though both companies had paid more in dividends than their free cash flows can afford in their last completed financial year, Riverstone seems to be in a better position with its positive free cash flow.

Riverstone’s dividend payout ratio in terms of earnings was 40.7% while that of Top Glove was 50%.

A Foolish takeaway

By considering all the three factors above, I see Riverstone as the safer dividend share compared to Top Glove. The former has a higher dividend yield, a more conservative dividend payout ratio, and positive free cash flow.

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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 recommendations on Riverstone Holdings and Top Glove Corporation. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.