Hour Glass Ltd (SGX: AGS), or THG, is a luxury retailer of fine watches and timepieces. The group owns a network of 40 boutiques spread across the Asia Pacific region, and it has a long history and track record of delivering quality products to a discerning clientele.
THG has a strong relationship with many of the luxury watch brands stretching back decades, and Chairman Henry Tay and CEO Michael Tay are also very knowledgeable about the business. THG is one of a few premium watch boutiques in Singapore, the other being Cortina Holdings Limited (SGX: C41). In its recent Q1 2020 earnings, THG reported a 4% year-on-year rise in revenue and an impressive 19% year-on-year jump in net profit.
The group has also been consistently rewarding loyal shareholders with a steady dividend payment. The question now is – does this luxury retailer have room to further raise its dividend? Let’s have a look at three elements to the equation.
Free cash flow
The group has a pattern of very consistent FCF generation over the past five years, as capital expenditures are traditionally low in this business. Note that with the recovery in sentiment for luxury goods in FY 2017, operating cash flow also jumped up, and FCF correspondingly saw a massive jump. This FCF consistency bodes well for investors who are expecting a higher dividend in time.
Note that THG’s dividend was reduced by around 10% from FY 2015 to FY 2016 as a result of lower profitability resulting from a clampdown in luxury goods spending in China. However, with better overall sentiment and higher levels of optimism in the luxury watch market, THG has increased its annual dividend by 50% to S$0.03 in FY 2019. This shows management’s willingness to increase dividends in line with higher profitability in order to reward shareholders.
Dividend payout ratio
Finally, the payout ratio represents the proportion of profits that are paid out as dividends. A higher ratio means a company is paying out most of its profit as dividends rather than retaining the money to grow the business.
THG’s average payout ratio is around 25% to 30%, implying that it’s retaining at least 70% to 75% of its profits for reinvestment into the business. This also means there’s room for a higher payout ratio, probably in the range of 40% to 50%, and the group will still be able to retain sufficient profit to grow the business.
The Foolish conclusion
It looks like THG has significant room to raise its dividends as its FCF is getting stronger (and is accompanied by higher earnings) and the payout ratio remains low at just 30%.
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.