Both iFAST Corporation Ltd (SGX: AIY) and Singapore Exchange Limited (SGX: S68) belong to the finance industry, and are companies which operate platforms for clients to utilise. As a quick recap, iFAST Corporation is a financial technology company which operates an investment products platform for the sale and distribution of equities, bonds and unit trusts. Singapore Exchange Limited, or SGX, is Singapore’s sole stock exchange and its business is divided into three main business units: Equities and Fixed Income; Derivatives; and Market Data and Connectivity.
Both iFast and SGX pay quarterly dividends, and I decided to look at three aspects to determine which company is the better dividend share.
1. Dividend yield
The first aspect I looked at was the dividend yield. SGX pays out a total of 30 Singapore cents per year (7.5 Singapore cents per quarter). At the closing share price for SGX of S$7.49 on Friday, the dividend yield works out to be 4.0%. For iFast, the group pays out a total of 3.15 Singapore cents a year (0.75 cents per quarter for the first three quarters, followed by 0.90 cents in the last quarter). At iFast’s closing share price of S$1.09 on Friday, it translates to a dividend yield of 2.9%.
2. Dividend payout ratio
The dividend payout ratio tells investors how much of the earnings are being paid out as dividends, and this is expressed as a percentage. A higher payout would imply that growth is limited, therefore the company is paying out more of its earnings as dividends. This may also signal that dividends growth is limited as the business is essentially a cash cow. A lower payout ratio means that the company is reinvesting for growth, and that dividends may rise over time as a result of this reinvestment.
For SGX, its earnings per share (EPS) for the first nine months ended 31 March 2019 was 26.8 Singapore cents. I projected this out to 12 months to obtain an annualised EPS of 35.7 Singapore cents. Therefore, SGX’s payout ratio stood at 84%. For iFast, I used the FY 2018 (financial year ended 31 December 2018) earnings and came up with a payout ratio of 78.6%.
3. Prospect of higher dividends
Finally, I looked at the probability of dividends growing over time. Granted, there is no sure-fire way to assess if dividends are definitely going to rise, but one good proxy to use is the potential growth in the company’s business as well as its total addressable market (TAM).
For SGX, it is introducing new derivative products to boost volumes and to earn more revenue, and while it is seeing good momentum, it would still take a considerable amount of time to grow total volumes materially. iFast, on the other hand, still has a low asset under administration (AUA) level of S$8.75 billion (as at 31 March 2019) and has a 10-year plan in place to grow AUA to S$100 billion by 2028. The TAM for iFast seems larger and its growth potential (along with dividend increase potential) also seems higher.
Putting it all together
iFast is the winner for two out of the three attributes. Though its dividend yield may be lower than SGX’s, the company is reinvesting more of its earnings to grow, and it also has a larger TAM to tap on. As earnings rise, dividends should also rise in tandem. This allows me to conclude that iFast is the better dividend share as compared to SGX.
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 Singapore Exchange Limited and iFast Corporation Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange Limited and iFast Corporation Limited.