Compare three dividend-paying stocks on yield, payout ratio and dividend growth.
Open the latest annual reports for three SGX-listed companies that pay regular dividends, each from a different sector, and allow about twenty-five minutes. You'll put all three on one scorecard and rank them by how likely each dividend is to continue at its current level. Yield plays no part in the ranking. The question you're answering is which dividend is most likely to still be there in five years.
Many investors look at the highest yield first and then use the other numbers to justify it. Wei Ling, an investor with a shortlist of three SGX companies, used to compare stocks this way. This time she scored all three on the same sheet, filled in every column before looking at any totals, and then ranked them on which dividend is most likely to still be there in five years. Do the same, and leave the totals alone until every column is complete.
Choose three companies from three different sectors. If all three come from one industry, you end up comparing three versions of the same business, and you miss how much the numbers vary between industries. Leave out banks and REITs, because their payout ratios need a different reading. Lesson 2.2, "Payout ratio tells you how much room is left", explains why. Lesson 5.5 uses this scorecard format for REITs.
The companies can be ones you hold, ones you're curious about, or names from the STI factsheet you used in Lesson 2.4. You're practising a method here, and none of the companies is a recommendation to buy.
Give each company a column, with these rows:
price and date regular dividends per share over the last twelve months trailing yield without specials EPS payout ratio on earnings FCF per share payout ratio on FCF dividend per share five years ago five-year dividend growth per year any payout ratio above 100% any cut in the last five years and its stated reason
Dividend figures come from SGXNet announcements. Earnings and cash flow figures come from the latest annual report, and the price comes from the SGX website or your broker. Write the source and date beside every figure.
Trailing yield without specials is regular dividends per share over the last twelve months divided by the price, with any special dividends left out. The payout ratio on earnings is dividend per share divided by EPS. Free cash flow per share is operating cash flow minus capital expenditure, divided by shares in issue. You'll find both cash figures in the cash flow statement and the share count in the annual report. The payout ratio on free cash flow is dividend per share divided by FCF per share.
To get five-year dividend growth per year, divide this year's dividend by the dividend five years ago, raise the result to the power of 1/5 and subtract 1. In a spreadsheet, type =(new/old)^(1/5)-1.
Company A is a utility-type business priced at S$3.20. Its regular dividends over the past year came to S$0.16, a trailing yield of 5.0% (S$0.16 / S$3.20). With EPS of S$0.18, the payout ratio is about 89% (S$0.16 / S$0.18). FCF per share is S$0.15, putting the FCF payout at about 107% (S$0.16 / S$0.15). Five years ago the dividend was also S$0.16, so growth is zero.
Company B, an engineering firm, trades at S$1.50 and paid S$0.06, a yield of 4.0% (S$0.06 / S$1.50). EPS is S$0.12 and the payout ratio is 50%. FCF per share is S$0.10 and the FCF payout is 60%. The dividend five years ago was S$0.045, growth of about 5.9% a year ((0.06/0.045)^(1/5)-1).
Company C is a consumer business at S$0.80. It paid S$0.072, a yield of 9.0% (S$0.072 / S$0.80). EPS is S$0.06, for a payout ratio of 120%, and FCF per share is S$0.04, for an FCF payout of 180%. Two years ago it paid S$0.09, and it cut the dividend last year, citing weaker sales in its main market.
Now mark the flags. Every payout ratio above 100% gets one, and so does every cut in the last five years, with the stated reason written next to it. In the example, A's FCF payout is flagged, while C is above 100% on both measures and has already cut once.
Ignore the yield when you rank, and work from coverage, growth and the flags.
B comes first. It pays out half its earnings, its cash flow covers the dividend with room to spare, and its dividend has grown steadily.
A is second. Earnings cover the dividend but cash flow falls slightly short, and a flat dividend suggests earnings are not growing. When cash flow doesn't cover a dividend, check whether the shortfall comes from a one-off such as a large capital project.
C is last. It pays out more than it earns and much more than its cash flow, and it has already cut once. A yield as high as C's 9.0% is the market signalling that it expects more trouble. Module 3 covers stocks like Company C.
Here the ranking runs exactly opposite to the yield. It won't always turn out that way, but it happens often enough to make hiding the yield until the end worth the extra time.
On a finished scorecard, every cell holds a sourced, dated figure, every flag is marked, and each company has a rank with one or two sentences of reasoning. If a figure was hard to find or looked odd, write a note in that cell so it isn't left blank.
Fill it in for your own three companies, and when you write your ranking, make the case for the top one in terms of coverage and growth before you let yourself look at the yield column again.
Fill in the dividend scorecard for your three companies. Then write which one has the most secure dividend and why.
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