Friday, February 26, 2016

Sustainability of dividends

For dividend investors, we all wanted the above. How do you determine if dividends are sustainable beyond simple numbers like FCF, and NP above distribution? 

I like to share mine, and hope readers generously share theirs. I am
Talking about absolute sum of distribution not yield as yield is a function of price. Distribution amount can be the same or even increasing but yield falling due to runaway prices.

Determine "will" to give:
1) Track records and whether owners owned a significant stake (>35%)
2) Case of even in a bad year, dividends is maintained. While some might consider as imprudent, I see it as a good will gesture. Examples include Venture and CMPH 

2) Level of buffer of FCF
Dun just take FCF as OCF - Capex. Take tax away too, there are some reports that add back finance costs in OCF. Take that away too. 

3) Growth drivers.
It's easier for reits in this area. CCT has capital green, MIT has BTS project. 

But growth drivers can evaporate into thin air. APPT Taichung, CMPH jiurui are examples. APPT not only has Taichung, it has broadband and cross selling as growth drivers. So similar to Starhub. If one doesn't work out, still has the other 2. Well... 

Organic growth are even harder to determine unless you are a insider. Look how sexy aviation turn into MRO within 6 months. 

4) Management execution history
This is the easy part. Read AR for the last 5-10 years. What are their plans for expansion and growth? Did they pan out as planned? If not, why? ST engineering has quite a good record if not flawless record. I bought ascendas REIT for this reason too, I find the pattern of placement, sale of property for a newer property that is yield accretive very attractive.

5) Do stress tests and see if the company can continue their dividends. It is not rocket science and assumptions are rubbish in, rubbish out, but it does give u a sense. I did stress test for CMPH and CapitalComercical Trust before. If intersted, can refer to past posts.

6) Buy when industry is not doing well rather than when industry is doing well.
If give you the true earnings and if company can do well/ ok in a downcycle what are the chances in can't do well in a upcycle. But no one can predict the bottom. I thought I bought Sembcorp and Lee metals at a low. But low get lower. But maybe you shall not try to get something at a high? Perhaps high can get higher? Oops I am confused. 

I am done. What is in your bag?

6 comments:

  1. Replies
    1. Hi EH,

      I have STENG. Look at ARA briefly but had not went deep.

      Why do you think dividends are sustainable?

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  2. Like to add on to few more points to sustainability of Dividends which i look at.

    1. Have low debt servicing ratio.
    2. Look at business model (Cyclical Business have unpredictable dividends during the down cycle)
    3. Mid to big Caps (From experience, i find small caps have unpredictable dividends)
    4. Dividend payout ratio and dividends per share history (5 - 10 years)

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  3. Thanks Solace!

    Talking about payout ratio. If it is fixed, it means the actual distribution will be volatile. Another company I am looking at closely is uob kayhian, which distrubute 50% of profits...

    No ammo thou lol

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  4. Hi SI

    That is one really good lists of factors out there.

    For me, I'd like to take a look at their past records as well as determine if they are cyclical in nature as an industry or not. Like you said, if you normalized their bad years during a bear market and they look ok, what's not to like during good times?

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    Replies
    1. Hi B,

      Indeed. Personally, the concept is simple but when executed, it needs some experince and luck. Maybe I will write another post about dudes in the dividends investing journey

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