Some metrics which I have mentioned in my previous FA posts include ROE, dividend yield, PE and PB. There's one metric which I have not talked much about is Payout Ratio.
Payout ratio is an important metric that give us a feel of how sustainable would the future dividends of a company be (related: The Dividend Trap). This metric often gets overlooked because it is not a readily available ratio (unlike PE, PB, yield) on websites and requires some manual calculations. It's simple enough though, so we should really be taking it into account when making an investment decision. What it shows us is the net income that a company does not reinvest in the business, use to pay off debt, or add to its cash reserves (source: Investopedia).
Below is a screenshot from SGX website under the company's Financial data of Thaibev. From there we can see the net income for a particular year and the total cash dividends paid.
We can get the payout ratio by this formula: (Total cash dividends paid / net income) x100
There is also another formula which is a wee bit more troublesome to calculate.
Thaibev payout ratio is 75% (year 2018).
Payout ratios of some other companies that I have been monitoring:
^ - financial year ended 2019. The rest are of year 2018.
The only part which I don't understand is why the net income (boxed in red below) is not of the same figure as shown in the financial statement above. It is markedly lower. Is it a YTD net income?
"A company with a current ratio less than one does not, in many cases, have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than one indicates the company has the financial resources to remain solvent in the short-term. However, because the current ratio at any one time is just a snapshot, it is usually not a complete representation of a company’s liquidity or solvency." (Source: Investopedia)
Payout ratio is an important metric that give us a feel of how sustainable would the future dividends of a company be (related: The Dividend Trap). This metric often gets overlooked because it is not a readily available ratio (unlike PE, PB, yield) on websites and requires some manual calculations. It's simple enough though, so we should really be taking it into account when making an investment decision. What it shows us is the net income that a company does not reinvest in the business, use to pay off debt, or add to its cash reserves (source: Investopedia).
Below is a screenshot from SGX website under the company's Financial data of Thaibev. From there we can see the net income for a particular year and the total cash dividends paid.
We can get the payout ratio by this formula: (Total cash dividends paid / net income) x100
There is also another formula which is a wee bit more troublesome to calculate.
Thaibev payout ratio is 75% (year 2018).
Payout ratios of some other companies that I have been monitoring:
| Company | Div % | Net income | Dividends paid | Payout ratio | |
| BN4 | Keppel Corporation | 3.81 | 1,042.57 | 526.15 | 50% |
| C52 | ComfortDelgro | 4.26 | 439.3 | 225.1 | 51% |
| Z74 | Singtel^ | 5.43 | 3,745.90 | 2,856.60 | 76% |
| S68 | SGX^ | 4.39 | 474.49 | 401.4 | 85% |
| C31 | Capitaland | 3.39 | 2,849.81 | 504.09 | 18% |
| BS6 | YZJ Shipbuilding | 5.1 | 3,623.80 | 857.09 | 24% |
The only part which I don't understand is why the net income (boxed in red below) is not of the same figure as shown in the financial statement above. It is markedly lower. Is it a YTD net income?
Other simple metrics that we can look at to have a feel on sustainability would be the operating income and operating margin.
If we see the operating expenses going up disproportionately to revenue then we know that the company has not been very efficient in generating income. Another possibility might be because of business expansion or recent acquisitions where the new units have not started contributing to the operating income.
We can also take a glance at the Ratios right at the bottom of the SGX page. Here I am more concern with the debt which is represented in Current ratio and Debt/ Equity ratio.
High payout ratio plus high debt (or increasing debt) equals "impending train wreck".
"A company with a current ratio less than one does not, in many cases, have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than one indicates the company has the financial resources to remain solvent in the short-term. However, because the current ratio at any one time is just a snapshot, it is usually not a complete representation of a company’s liquidity or solvency." (Source: Investopedia)
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Some people prefer Div/FCF as earnings or net income can be manipulated (creative accounting, financial engineering).
ReplyDeleteHi Spur,
DeleteYes thanks for pointing that out!
I have posted about FCF before but didn't put it in the context that we could also look at it as part of a ratio.
High Value Is Not The Same As Low Price
Hi rainbow coin
ReplyDeleteDividend paying companies must be supported by high operating cash flow and free cash flow. As some compnaies had limited opportunities to grow further, returning capital to investors is generally a good choice.
You might want to use your framework to do a health check on your existing picks. The worst thing you want to happen to a dividend portfolio is dividend cuts which will introduce sharp crashes to the share price.
Hi INTJ,
DeleteA dividend cut that happens for good reasons eg. business expansion or accretive acquisitions, any share price plunge would be temporary as business growth will eventually compensate.
"Bad" dividend cut that occurs because a reducing income / cash flow in the business cannot sustain its payout would no doubt cause a sharp price crash that is hard to rebound.
I think my most concerned holding at this time would be Singtel.
To add to Spur's point, FCF can also be "manipulated" to look good. https://youtu.be/gl3OLtEX2PM
Hi Uncle Temperament,
ReplyDeleteWhether on book or in bank how to verify? 😰
Unless got special audit or inside spill beans? Lol.