You will compare three dividend-paying stocks on yield, payout ratio and dividend growth.
Wei Ling had a shortlist of three SGX companies and a habit she wanted to break. Every time she compared them, her eye went straight to the highest yield, and the rest of the numbers became reasons to justify it. This time she set out to score all three on the same sheet, filled in every column before looking at the totals, and ranked them on a different question: which dividend is most likely to still be there in five years.
That is this exercise. It takes about twenty-five minutes once you have the annual reports open.
Pick three SGX-listed companies that pay regular dividends, each from a different sector. Leave out banks and REITs for this exercise, because lesson 2.2, Payout ratio tells you how much room is left, explained why their payout ratios need a different reading. Choosing from different sectors stops you comparing three versions of the same business and teaches you how the numbers vary by industry.
You can choose companies you hold, companies you are curious about, or names from the STI factsheet you used in lesson 2.4. The exercise is about method, and nothing in it suggests buying any of them.
Set up one column per company and these rows:
Price and date, regular dividends per share over the last twelve months, trailing yield without specials, earnings per share, payout ratio on earnings, free cash flow per share, payout ratio on free cash flow, 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 the stated reason
Each figure comes from somewhere you can name: SGXNet announcements for dividends, the latest annual report for earnings and cash flow, and the SGX website or your broker for the price. Write the source and date next to each figure. You will reuse this format in lesson 5.5 for REITs.
For free cash flow per share, take operating cash flow less capital expenditure from the cash flow statement and divide by the number of shares in issue, which is in the annual report. For five-year growth per year, divide this year's dividend by the one five years ago, raise the result to the power of one fifth, and subtract one. In a spreadsheet that is =(new/old)^(1/5)-1.
Here are three made-up companies so you can check your arithmetic.
Company A is a utility-type business priced at S$3.20. It paid S$0.16 in regular dividends over the past year, for a trailing yield of 5.0%. Earnings per share were S$0.18, so the payout ratio is about 89%. Free cash flow per share was S$0.15, so the free cash flow payout is about 107%. The dividend five years ago was also S$0.16, so growth is zero.
Company B is an engineering business priced at S$1.50. It paid S$0.06, a yield of 4.0%. Earnings per share were S$0.12, a payout ratio of 50%. Free cash flow per share was S$0.10, a free cash flow payout of 60%. Five years ago the dividend was S$0.045, so it has grown by about 5.9% a year.
Company C is a consumer business priced at S$0.80. It paid S$0.072, a yield of 9.0%. Earnings per share were S$0.06, a payout ratio of 120%. Free cash flow per share was S$0.04, a free cash flow payout of 180%. The dividend was S$0.09 two years ago and was cut last year; the stated reason was weaker sales in its main market.
Flag every payout ratio above 100% and every recent cut, with the reason given. In the example, Company A's free cash flow payout is above 100%, and Company C is above 100% on both measures and has already cut once.
Now rank them on how likely the dividend is to continue at its current level. Ignore the yield for this step.
Company B comes first. It pays half its earnings, its cash flow covers the dividend with room left, and the dividend has grown steadily. Company A comes second. Its earnings cover the dividend, but cash does not quite, and the flat dividend suggests earnings are not growing. Worth checking whether the cash shortfall is a one-off, such as a large capital project. Company C comes last. It pays out more than it earns and much more than it brings in as cash, it has cut once already, and its 9.0% yield is the market's way of saying it expects more trouble. Module 3 is about stocks like C.
Notice that the ranking runs exactly opposite to the yield. That is not always the case, but it happens often enough that a scorecard which hides the yield until the end is worth the extra time.
A finished scorecard has every cell filled with a sourced figure and a date, every flag marked, and a ranking with one or two sentences of reasoning for each company. Where a figure was hard to find or looked odd, say so in a note rather than leaving it 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.
Complete the dividend scorecard for three companies and write which one has the most secure dividend and why.
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