Not many companies can boast of a 17-year track record of raising dividends, but Top Glove Corporation Berhad (SGX: BVA) is one of them. Top Glove is the world’s largest manufacturer of rubber gloves and produces a range of high-quality gloves for a variety of industries (primarily healthcare). The group owns 40 factories as of June 2019 that have a total of 648 production lines for a glove production capacity of 60.5 billion pieces per year.
Top Glove’s impressive growth in both profit and dividends over the years is thanks to its commitment to expand and grow its capacity as well as favourable tailwinds in the glove industry. The question on investors’ minds might be: Is there any further room for dividend growth? Let’s take a look at several factors in order to determine this.
Impressive dividend growth
Source: Top Glove’s Q3 2019 Earnings Report
From a dividend of 0.2 Malaysian sen in 2001, the group has increased its payout over the years to 8.5 Malaysia sen, an almost 41-fold increase.
Glove demand is set to grow by 10% annually, and the group is well-positioned to take advantage of this long-term tailwind. Top Glove is opening a total of 50 new production lines in the remainder of the calendar year (CY) 2019, which will add a further 5.4 billion pieces per year to its production capacity.
For next year, the group plans to open its new Vietnam and Thailand factories in Q2 and Q4 of CY 2020, respectively, in order to further boost production capacity. These factories, along with another 106 new production lines from its Malaysian expansion, will add a further 17.4 billion pieces per year to total capacity, bringing Top Glove’s total annual capacity to 83.3 billion gloves by the end of 2020. This is a capacity increase of 37.7% over 18 months and represents strong potential growth in revenue, profit, and cash flow for the group.
A recession-resistant business
Medical gloves are a recession-resistant business as such gloves are a staple in the healthcare industry, which traditionally demonstrates resilient demand through various economic cycles. This ensures Top Glove’s business remains insulated in the event of a sharp recession.
In addition, the group is also able to adjust the selling prices of its gloves in response to changes in raw material pricing. Though its Q3 2019 operating profit dipped by 29.3% year on year, that was due to a 22% increase in natural rubber prices that had not yet been passed on to customers, as there is a time lag for passing on cost increases. Selling prices were adjusted from May 2019 onwards and should be reflected in the upcoming Q4 2019 earnings.
Still room for higher dividends
Top Glove looks poised to raise its dividend further if it continues to see sustained and increased demand for its gloves. Its ambitious expansion plan will increase capacity significantly and allow the group to enjoy higher sales volumes. Investors should thus sit tight for even higher dividends in time to come. At Top Glove’s last traded price of S$1.52, the historical dividend yield is around 1.9%.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned. The Motley Fool Singapore has recommended shares of Top Glove Corporation Berhad.