Many companies pay dividends when operating under normal economic conditions. It is a known fact that recessions come around every decade or so, and investors may be worried as to whether dividends may get cut or even eliminated during such times. Whether a company can continue to pay would depend not just on its business moat, but also whether management has been conservative in managing its balance sheet and astute in deploying capital.
I decided to dig back in time to one of the greatest financial and economic upheavals in recent history: the Great Recession of 2008-2009. Investors who are old enough may recall that this was a period of severe financial turbulence as the global financial system seized up due to the subprime mortgage debt crisis in the US. The Great Recession was considered one of the most severe financial crises in recent memory, with the only other parallel being the Great Depression, which occurred in the early 1930s.
Here are three companies that managed to continue paying dividends throughout the entire Great Recession. I used three years’ worth of dividends — 2008 through to 2010 — as the crisis only deepened in 2008, and a moderate recovery was in place by 2010.
1. Singapore Exchange Limited
Singapore Exchange Limited (SGX: S68) or SGX, is Singapore’s sole stock exchange. The group’s business is divided into three main business units: equities and fixed income, derivatives, and market data and connectivity.
Due to its monopoly status and strong competitive moat, SGX has managed to continue paying out a dividend even through the Great Recession. In fiscal year 2008 (the company ends its fiscal year on 30 June), it paid out a total dividend of 38 Singapore cents per share. The following year (2009), the dividend was reduced to 26 Singapore cents, and in 2010, it was increased slightly to 27 Singapore cents.
2. VICOM Limited
VICOM Limited (SGX: V01) runs a testing and inspection business for vehicles and also has an arm that performs non-vehicular testing. The group has a dominant market share of above 70% in Singapore and is majority-owned by ComfortDelGro Corporation Ltd.
Through the crisis, VICOM has managed to continue paying dividends, and its dividend was even raised during the period from 2008 to 2010. In 2008, VICOM paid a dividend of 9.25 Singapore cents per share. In 2009 and 2010, the dividend was raised to 11.8 and 16.1 Singapore cents, respectively.
3. Boustead Singapore Limited
Boustead Singapore Limited (SGX: F9D) is one of the oldest companies in Singapore and is a conglomerate with four main business divisions: energy-related engineering, real estate solutions, geospatial technology, and healthcare technology. The group has always maintained a conservative balance sheet and has a long track record of generating copious amounts of free cash flow. This has underpinned its ability to pay dividends through both good and bad times.
The group paid a total dividend of 5 Singapore cents for 2008. This declined to 4 Singapore cents in 2009 but was subsequently raised to 5.5 Singapore cents in 2010.
There are several common traits among these three companies that enabled them to pay a dividend even through one of the worst crises in living memory. First, they had a strong competitive moat and excelled in their areas of expertise — SGX in being the sole stock exchange, VICOM for its dominant market share in vehicular inspection, and Boustead for its expertise in industrial real estate and oil and gas engineering.
Another common trait is that all three businesses had solid balance sheets, with either no debt or strong net cash positions. A final common trait is that all three businesses had a history of generating large amounts of free cash flow, even before the crisis hit. This enabled them to weather the storm much better than companies that were highly indebted and relied on external financing for growth.
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, VICOM Limited, and Boustead Singapore Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange Limited, VICOM Limited, and Boustead Singapore Limited.