SATS Ltd (SGX: S58) is a company with two business segments: Food Solutions and Gateway Services. The Food Solutions segment covers airline catering, food distribution, and industrial catering whereas the Gateway Solutions segment is involved in ground handling services of passengers, flights, and cargo.
In a previous article, I highlighted a number of reasons why SATS might be a good share for dividend investors to own for the long term. As a quick recap, those reasons were:
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- SATS has a solid financial track record
- It has a growing dividend
- The balance sheet is strong
But, all companies come with risk and there is one risk with SATS that investors should take into account as well before deciding whether they should be investing in the company right now.
The risk: A high valuation
As investors, we should always invest in a share at a price that’s less than its value. This applies not only to value investors, but also to dividend investors. In simple terms, that means we should be paying less than a dollar for each dollar of assets.
One way to gauge SATS’s valuation is to compare its price-to-earnings (PE) and price-to-book (PB) ratios with those of the market. I will be using the SPDR STI ETF (SGX: ES3) as a proxy for the market; the SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI).
SATS’s share price is at S$4.77 currently, which gives the company PE and PB ratios of 20.5 and 3.3, respectively. These are significantly higher than the SPDR STI ETF’s selfsame ratios of 11.5 and 1.1.
On one hand, it is clear that SATS exhibits some positive traits (its good track record of growth, history of growing its dividend, and strong balance sheet). On the other hand, investors need to consider whether these traits will be sustainable in the long run; it’s a crucial consideration given the company’s high valuation right now.
There are many things to like about SATS as a dividend stock for the long-term. But, investors need to consider whether its current high valuation (as compared to the market average) is justifiable.
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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 Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has a recommendation for SATS Ltd.