Introduction
When you sometimes buy a stock for dividends, you look only at the current yield of the stock and take it for granted that it is like a fixed desposit where the interest rate fluctuates little.
The common psychological thinking is that the stock IS EXPECTED to maintain the dividend payout, but that isn’t usually the case.
Dividend per share per year (DPS)
fluctuates.
In a
growth company, what start off as
a small DPS relative to share price might grow and grow so much so that its dividend yield is eventually higher or equivalent to some stock that pays high yield.
MacDonald’s and
Pepsi comes to mind. Their dividends just grow and grow for 20 years plus. Great investment.
[caption id="attachment_2564" align="alignright" width="150" caption="Photo by Tony the Misfit"]
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In a
mature company, the dividend payouts tend to fluctuate. When business is good they pay out more than average, else they pay out less. In Singapore, most of the companies such as UOB, DBS and SembCorp is like that.
Then you have your
dividend companies that you buy for its consistent cashflow, companies such as
Telcos, Utilities, REITs, MLP. Their DPS is consistent and makes then easy to value. A trend that we see is that these companies find it
very difficult to value create and grow their profits and cashflow with the existing resources.As such DPS tend to stagnate or in difficult times go down. So what start off as a high yield at your purchase price ends up big very small.
For stocks that consistently pays dividends more or less, their share price
will reflect the expectations of investors and this affects you as an investor both
trying to get in or
already vested in the company.
Case Study: Starhub
I decide to use Starhub since it is one of my vested holdings and recently they announce
a first quarter results that is less than satisfactory [
Report here >>].
Starhub is a telecommunications company based in Singapore and listed on the SGX. The
dividend guidance given is that they will maintain a minimum DPS of SGD $0.05 per quarter or SGD $0.20 per year.
Based on my highest purchase share price $2.37, $0.20/$2.37 comes up to 8.4% yield on cost. That’s not a bad yield, since I bought Starhub after understanding that telecommunications stocks’ business economics enable them
to generate consistent operating cashflow which makes dividend payout predictable.
At an
EV/EBITDA of nearly 6 times, the valuation looks just about right.
For stocks like this we don’t expect much surprises, but history have taught us that companies that have all the while generate consistent earnings
will faced business pressures that changes the profitability of what you might once evaluated as strong.
Competition, Substitutes and Mismanagement are some causes of this.
Starhub’s results in the first quarter resulted in the profits being halved in the first quarter. This
impacts the operating cashflow and makes investors question whether they can pay out the SGD $0.20 dividend.
To make understanding easier i have come up with 2 Dividend Sensitivity Tables
found on my Google Spreadsheet under Dividend Sensitivity.
Read more...
