What Does ComfortDelgro Corporation Limited’s Profit Tell Us About Its Dividend
ComfortDelgro Corporation Limited (SGX: C52) is a transport company with operations mainly in Singapore, Australia, the United Kingdom, and China. It’s the largest private taxi operator in Singapore and also the majority owner of vehicle and non-vehicle testing and inspection outfit Vicom Limited (SGX: V01) and bus and rail services operator SBS Transit Ltd (SGX: S61).
Comfortdelgro has been a favourite amongst income investors due to its long-term dividend track record. Yet, we know that past history is no guarantee of future performance, especially now with an increasingly challenging operating environment.
In this article, we will try to answer one important question about this company – is current dividend sustainable in the foreseeable future?
Unfortunately, there is no easy answer. Unlike a stock’s dividend yield, which is easy to calculate, there is no simple calculation that can tell investors for sure whether a company’s dividend is sustainable.
That said, there are some things about a company’s business we can look at for clues. Thus, we will use three simple tests to help us arrive at a conclusion. The tests are 1) the company’s track record in making profit 2) free cash flow and dividend analysis 3) balance sheet strength
In this article, we will address the first test, which is to have an overview of the company’s track record in making profit.
Track record in generating a profit
A company’s profits are an important source of its dividends.
As we know, profit is the result of sales minus cost. Thus, what we would ideally like to see are a few things in the company’s five-year track record:
- Sustainable revenue or better still, sustainable and growing revenue
- Sustainable or increasing profit margins
- Combining the above, we want to see that the company has no big dips in operating and net profit
With the above criteria set up, let’s see how Comfortdelgro performs in those criteria above:
|% change from last year||3.9||5.7||8.1||1.5||-1.3|
|Operating Margin %||11.6||11.4||10.9||11.0||11.4|
|Net profit %||7.0||7.0||7.0||7.3||7.8|
|% change from last year||3.3||3.4||3.8||2.0||2.4|
|% change from last year||6.0||5.6||8.0||6.3||5.0|
Source: ComfortDelGro’s 2012-2016 financial statements
From the above, we can draw a few observations.
Firstly, Comfortdelgro revenue growth rates has slowed/turned negative in the last two years after reaching a high of 8.1% in 2014.
Operating margin has fluctuated between 10.9% and 11.6% in the last 5 years. Net profit margin, however, has improved from 7% in 2012 to 7.8% in 2016.
Putting all together, we can see that net profit has grown consistently between 5% and 8% in the last five years.
A Fool’s take
Overall, we can see that ComfortDelGro’s profitability grew year after year in the last 5 years. One thing to note is that in the first three years, growth was driven by revenue growth, whilst in the last two years, growth was driven by margin expansion.
So how well does Comfortdelgro perform in this test?
Personally, on a scale of poor, average, strong, Comfortdelgro would probably score above average on sustainability of net profit.
Let’s now move on to the second test here, which is on free cash flow analysis.