Could KSH Holdings Limited (SGX:ER0) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
In this case, KSH Holdings likely looks attractive to investors, given its 4.9% dividend yield and a payment history of over ten years. We’d guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying KSH Holdings for its dividend, and we’ll go through these below.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, KSH Holdings paid out 110% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. KSH Holdings paid out a conservative 49% of its free cash flow as dividends last year. It’s good to see that while KSH Holdings’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Is KSH Holdings’s Balance Sheet Risky?
As KSH Holdings’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. KSH Holdings has net debt of 3.50 times its EBITDA, which is getting towards the limit of most investors’ comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Interest cover of 4.34 times its interest expense is starting to become a concern for KSH Holdings, and be aware that lenders may place additional restrictions on the company as well.
Remember, you can always get a snapshot of KSH Holdings’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. For the purpose of this article, we only scrutinise the last decade of KSH Holdings’s dividend payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was S$0.017 in 2010, compared to S$0.022 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.9% a year over that time. KSH Holdings’s dividend payments have fluctuated, so it hasn’t grown 2.9% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company’s earnings are not consistent.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. KSH Holdings’s EPS have fallen by approximately 24% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
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. We’re a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Earnings per share are down, and KSH Holdings’s dividend has been cut at least once in the past, which is disappointing. Overall, KSH Holdings falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
Are management backing themselves to deliver performance? Check their shareholdings in KSH Holdings in our latest insider ownership analysis.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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