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Does SBS Transit Ltd Have Room To Increase Its Dividends Further?

SBS Transit Ltd (SGX: S61) provides bus and rail services in our city-state. Under its rail services business, SBS Transit operates the North East Line (NEL), the Downtown Line (DTL), and the Sengkang and Punggol Light Rapid Transit (SPLRT).

On 12 February, SBS Transit announced its financial results for the 2018 fiscal year. For the year, net profit surged 70% year-on-year to S$80.1 million. Consequently, SBS Transit hiked its total dividend for the year by around 70% to 12.9 Singapore cents from 7.6 Singapore cents in 2017.

Can SBS Transit afford to pay higher dividends in the coming years, or is it the end in terms of dividend growth? Let’s find out by using the company’s free cash flow figures and other metrics.

Under the hood of the bus

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 SBS Transit’s free cash flow, we can take its operating cash flow (given as “Net cash from operating activities” within its Group Cash Flow Statement) and deduct its capital expenditure (given as “Purchase of vehicles, premises and equipment” from the same financial statement).

The following table shows some essential cash flow and dividend metrics for SBS Transit from 2014 to 2018:Source: S&P Global Market Intelligence and author’s calculations from SBS Transit’s 2017 annual report

From the table above, we can see that SBS Transit has been producing positive free cash flow since 2016. On 1 September 2016, SBS Transit transitioned to the Bus Contracting Model (BCM), helping the company become asset-light and generate plenty of free cash flow in the process. SBS Transit’s free cash flow surged 216% from S$41 million in 2016 to S$131 million in 2018. With the higher free cash flow, total dividend per share has also ballooned 155% from 5.05 Singapore cents in 2016 to 12.90 Singapore cents in 2018.

I believe this is not the end of dividend increases at SBS Transit.

In 2018, SBS Transit’s dividend of 12.90 Singapore cents per share was just 30.7% of its free cash flow per share for the year. In terms of earnings per share, SBS Transit’s dividend payout ratio was 50.2% in 2018. These two metrics are conservative in my opinion.

As of 31 December 2018, SBS Transit had S$32.7 million in cash balance, and S$75 million in total borrowings, translating to a net debt position of S$42.3 million. The debt level is not high, given SBS Transit had a net gearing ratio of 8.5% at the end of 2018.

There is also potential for earnings and free cash flow to improve further in 2019 as the Seletar and Bukit Merah bus packages commenced only in March 2018 and November 2018 respectively.

The Foolish takeaway

Due to the positive earnings update, SBS Transit’s share price rose 6% to end at S$3.16 on Wednesday (13 February). At that price, it has a trailing dividend yield of 4.1%, above that of the SPDR STI ETF (SGX: ES3). The exchange-traded fund (ETF), which tracks the fundamentals of the Straits Times Index (SGX: ^STI) had a dividend yield of 3.6% on the same day.

Given the conservative dividend payout ratio, both in terms of free cash flow and earnings, manageable debt, and potential earnings growth, I feel there is still room for SBS Transit to increase its dividend from the current level of 12.90 Singapore cents.

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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 SBS Transit Ltd. Motley Fool Singapore contributor Sudhan P owns shares in SBS Transit Ltd.