CFA Society Singapore
SINGAPORE (Dec 10): In a recent report, KGI Securities highlighted some dividend-yielding stocks in a one-page report titled “High Dividend Watchlist”. According to the broker, these stocks offer higher growth compared with real estate investment trusts (REITs), but are more volatile. The amount of dividends paid out depends on a company’s earnings, and the dividend payout ratio is the ratio of dividends to net profit, or the ratio of dividend per share (DPS) to earnings per share (EPS).
REITs have to pay out at least 90% of distributable income to enjoy tax transparency. Hence, if they need to make acquisitions for growth, they have to lean on their unitholders and investors to raise equity, which gives rise to questions as to whether the new assets are accretive to distributions per unit and yield.
Companies are more flexible. Their management and boards can decide on their payout ratios depending on investment and capital expenditure needs, cash and debt levels, and earnings.
Among KGI Securities’ favourites are NetLink NBN Trust, ComfortDelGro Corp, Singapore Telecommunications, DBS Group Holdings, which is the highest-yielding bank, Silverlake Axis, Singapore Technologies Engineering and SATS.
“There are attractive opportunities among small-mid caps, but expect higher volatility in their share price compared with blue chips,” the KGI report says. Its favourites are Fu Yu Corp, Valuetronics Holdings, China Aviation Oil (CAO) and CSE Global.
Special payouts boost dividends
Silverlake Axis, which provides technological support to financial services companies including banks, has been very generous with its dividends for the past five years. According to its latest annual report, it continued to maintain a high dividend payout ratio of about 70% of reported profits through four quarterly dividends. For FY2018, the company’s payout ratio was 175%.
Why was the payout ratio so high? In FY2017, the company had a net gain of RM426.2 million on disposal of shares in an associate, Global InfoTech Co, and received a total cash inflow of RM532 million. From this amount, Silverlake Axis paid four special dividends, with a fifth paid in 4QCY2018. Silverlake Axis has a June year-end. The five special dividends totalled 4.1 cents a share, or RM330 million, which translates into about 62% of the total cash inflow from the GIT shares sale, the company says.
For the three months to Sept 30, or 1QFY2019, net profit rose 70% y-o-y to RM57.94 million ($19.1 million). The company declared an interim dividend of 0.3 cent, or a payout ratio of around 41%. In the same period a year ago, dividends were higher as the company had declared a special dividend of 0.5 cent as well as an interim dividend of 0.3 cent. Based on Silverlake Axis’ last traded price, annualised dividend yield is just 2.85%, assuming no special dividends.
Similarly, Fu Yu’s FY2017 dividend payout ratio of 252% was more than its net profit. Based on its EPS of just 0.59 cents, this translates into a DPS of 1.5 cents. The company manufactures precision plastic components.
In 2016, Fu Yu adopted a dividend policy to distribute at least 50% of profit. So far this year, its board has declared a second interim dividend of 0.3 cent a share. Together with the first interim dividend of 0.6 cent a share, it represents a dividend payout ratio of about 50.4%, based on net profit of $9.26 million for 9MFY2018, which was up three times y-o-y. However, unless there is a special dividend, it is unlikely to match last year’s dividend. Still, its annualised dividend yield would be 6.3% should the company declare 0.3 cent for 4QFY2018. The stock last traded at 19 cents.
As at Sept 30 this year, Fu Yu was in a net cash position of $77.3 million. Shareholders’ equity stood at $163.6 million, equivalent to a net asset value of 21.73 cents a share. Cash per share is 10.27 cents. The company had a selective capital reduction exercise in June this year to privatise a subsidiary that was listed on Bursa Malaysia, LCTH Corp.
As at Sept 30, Valuetronics — an integrated electronics manufacturer — was in a net cash position of HK$798.2 million ($140 million) after the distribution of a cash dividend of HK$85.7 million for 1HFY2019, or a dividend per share of five HK cents. This is lower than the seven HK cents for the same period last year. (The company has a March year-end.) The dividend payout ratio works out to 91% for the first half, higher than its official dividend policy, which is to maintain a payout ratio of 30%, according to its annual report.
The company’s policy is also to keep cash on hand. “For Valuetronics, cash is a strategic asset that helps us to create sustainable long-term shareholder value. We are also maintaining a cash reserve to allow us to respond to merger-and-acquisition opportunities as and when they arise,” the company says.
For FY2018, Valuetronics paid a dividend of 27 HK cents a share, which included a special dividend of five HK cents a share. If FY2019’s dividends are annualised, dividend yield will be 2.57%, based on the last-traded price of 66.5 cents. The stock has fallen some 33% since end-March, when the dividend yield was 4.63%.
CAO styled as growth stock
CAO’s dividend policy, based on a growth-based dividend payout formula, comprises 30% of annual net profits. CAO did not declare an interim dividend and this is probably part of its policy. For FY2017, the company announced a DPS of 4.5 cents, or a payout ratio of around 32%, based on dividends paid of US$27.68 million ($38 million) and net profit of US$85.3 million.
For this year, earnings have been somewhat volatile. While net profit for 9MFY2018 is up 7.62% y-o-y to US$75.13 million, 3QFY2018 net profit is down 7.99% to US$18.93 million. If CAO adheres to its payout ratio strictly, DPS could be higher if the company has a good fourth quarter. In this event, DPS could rise to 5.18 cents, translating into a dividend yield of 4.2%.
CAO is a key supplier of imported jet fuel to China’s civil aviation industry, which is seen as a growth industry as China moves towards a services-oriented economy.
This story appears in The Edge Singapore (Issue 860, week of Dec 10) which is on sale now. Subscribe here