Is ComfortDelGro Corporation Limited (SGX:C52) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, ComfortDelGro likely looks attractive to investors, given its 4.8% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding ComfortDelGro for its dividend, and we’ll focus on the most important aspects below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, ComfortDelGro paid out 77% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. ComfortDelGro paid out 106% of its free cash flow last year, which we think is concerning if cash flows do not improve. ComfortDelGro paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough free cash flow to cover the dividend. Cash is king, as they say, and were ComfortDelGro to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
Remember, you can always get a snapshot of ComfortDelGro’s latest financial position, by checking our visualisation of its financial health.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. ComfortDelGro has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was S$0.048 in 2010, compared to S$0.10 last year. Dividends per share have grown at approximately 8.1% per year over this time.
Companies like this, growing their dividend at a decent rate, can be very valuable over the long term, if the rate of growth can be maintained.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. ComfortDelGro has grown its earnings per share at 2.2% per annum over the past five years. ComfortDelGro’s earnings per share have barely grown, which is not ideal – perhaps this is why the company pays out the majority of its earnings to shareholders. That’s fine as far as it goes, but we’re less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. Earnings growth has been limited, but we like that the dividend payments have been fairly consistent. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than ComfortDelGro out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 13 ComfortDelGro analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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