Are Dividends from VICOM Limited Sustainable?
The dividend yield of a company tells us nothing about the sustainability of its dividends in the long run. A company that is yielding say, 4%, may or may not be able to sustain the 4% yield the following year, assuming there’s no change in the share price.
To find out if the dividend dished out by a company is sustainable, we have to look at its free cash flow and dividend payout ratio instead. By the word “sustainable,” I mean that the company’s dividends can be paid from the cash generated from daily operations, and not from the accumulated cash balance over the years.
With these in mind, let’s find out if VICOM Limited’s (SGX: V01) dividends are sustainable. Currently, the firm is going at S$5.70 per share and sports a dividend yield of 3.8%, excluding any special dividends.
The table below shows a summary of some of the key figures from VICOM’s past few financial years (its financial year ends on 31 December):Source: VICOM Limited’s Annual Reports
It can be seen from the table above that free cash flow had improved from S$26 million in FY2012 to S$29.2 million in FY2016.
With the uptick in free cash flow, the total dividends paid per share had grown from 18.2 cents to 26.5 cents during the same time frame.
The free cash flow and dividends paid out declined in FY2016 as compared to FY2015. This could be a cause for concern, but the overall trend is still up.
Usually, the more the free cash flow that is generated over the years, the higher the chance of a company paying the cash out as dividends to shareholders.
Let’s turn our attention to the dividend payout ratio now. The figure had increased from 0.61 in FY2012 to 0.83 in FY2016. The dividend payout ratio tells investors what percentage of a company’s earnings are paid out yearly as a dividend.
Since the second quarter of FY2017, VICOM had revised its dividend policy to pay out of 90% of its net profit as dividends, from the previous payout of 50%. Therefore, the dividend payout ratio should increase to 0.90 or more in the coming years.
An increase in the payout ratio could mean that the firm is transitioning into a mature company and that it does not need much of the cash to grow in the future. It can, thus, afford to pay the extra cash to shareholders as dividends.
In conclusion, with the generally increasing free cash flow and an increased dividend payout ratio in the future, dividends from VICOM are highly likely to be sustained in the years ahead.