When income investors invest, they keep an eye out for companies that are able to pay steady and sustainable dividends. One important criterion to look out for is the ability of the business to generate copious amounts of free cash flow. It’s also important to look at the business’s balance sheet and make sure it’s not too heavily geared, as a company beholden to the banks means its cash flow will be tied up.
What is more difficult to look out for, I believe, are companies that are not only able to pay dividends consistently, but can also sustain them (and in some cases, increase them) over an extended period of time. VICOM Limited (SGX: V01) is one such company, and it has been paying dividends over an amazing two decades! VICOM is engaged in the testing and inspection business and deals with vehicular and non-vehicular inspections.
Let’s take a look into how VICOM has been able to achieve this amazing feat.
Increasing profits, increasing dividends
VICOM has reported higher levels of profit year after year since 1999. A look back in history shows that VICOM’s profit after tax for the year ended 31 March 1999 (the company had a March year-end back then that was changed to a December year-end in 2002) at S$4.5 million. The group’s net profit for FY 2018 stood at S$34.7 million, for a compound annual growth rate (CAGR) of 10.7% over the last 20 years.
The dividends paid out have in fact grown by a higher quantum. VICOM paid out a dividend net of taxes of 2.22 Singapore cents in FY 1999; for FY 2018, the total dividend was 45.25 Singapore cents. This represents a CAGR of 16.3%. The share price has also gained significantly as a result of the combination of higher profits and dividends, going from S$0.71 at the start of 2000 to S$6.65 as of 31 May 2018, for a CAGR of 12.2% over 19 and a half years.
Generates large amounts of free cash flow
Investors should note that VICOM generates significant amounts of free cash flow year after year. Aside from occasional large capital expenditures relating to the purchase of new properties for their operations, the core business itself requires very little cash. This means the group can continually generate excess cash, which then piles up on the balance sheet.
Dominant market position
Another important factor is that VICOM’s business has occupied a dominant market position all these years, which is also key to it being able to increase both profitability and dividends. In addition to that, the business has also not suffered any form of disruptive influence all this time. These qualitative characteristics are important for investors to monitor as they would determine if the business is able to continue to grow dividends, or if an external factor may disrupt the momentum.
The Foolish summary
Investors who have held on to VICOM since 1999 are in a fantastic position, having enjoyed two decades worth of dividends and a share price that has risen more than 900%! This illustrates the power of a buy-and-hold strategy in the right business, and patience rewards the loyal investor as the company continues to grow both dividends and profit. The key is for investors to use this insight to find the next company that can pay dividends for the next 20 years.
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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 VICOM Limited. Motley Fool Singapore contributor Royston Yang owns shares in VICOM Limited.