While some investors prefer growth stock with higher potential for capital appreciation, the more risk averse would probably prefer stocks that have stable businesses and consistently pay out decent dividends. After all, if share prices were to fall during a down turn, investors would at least still be compensated in dividends (assuming the business is sound).
In this respect, companies which are cash rich would have the ability to sustain their dividend payouts even during years where operational performances are bad. Hence, we sorted some of the net cash companies (firms with cash and equivalents greater than total debts) listed on the Singapore Exchange and zoomed in on two firms that yield more than five percent.
Apart from net cash positions and dividend yield, the companies’ profitability, free cash flows and dividend payout history were some of the other metrics we looked at.
PNE Industries (PNE) operates two main business segments namely contract manufacturing (CM) and trading, with manufacturing plants in Malaysia and China.
The group’s CM segment undertakes the manufacturing of electronic controllers and other electrical and electronic products. On the other hand, the trading segment is involved in the production and sale of emergency lighting equipment and printing materials (primarily pre-sensitised plates).
At first glance, PNE’s top line appears to be declining over the past five financial years. However, closer inspection shows that the sharp decline seen in FY12 and FY13 were due to the disposal of underperforming subsidiaries. Between FY12 and FY 16, earnings before tax (EBT) excluding one-off and net profit have shown a general improvement.
On the cash flow front, the firm also ranks well, with positive free cash flow recorded for four out of the past five financial years (FY12 to FY16). The group’s coffers also more than quadrupled over the period from $8 million to $44.1 million as of 30 September, due to the disposal of underperforming units as mentioned above. PNE has a strong balance sheet, with no debt and total liabilities of $15.6 million.
Looking at the firm’s dividend payout records, we like that the company has been rewarding shareholders with dividends without fail since 2006. With a larger cash pile, dividend per share has been on an uptrend in the past years.
Based on 16 December’s close price of $0.83 per share, the latest FY16 total dividend of $0.07 per share translates to a dividend yield of 8.4 percent.
With net cash making up approximately two thirds of its market capitalisation and a profitable underlying business, investors should certainly take a second look at PNE.
Chemical Industries (Far East)
The next company we take a deeper look at is industrial chemical supplier Chemical Industries (Far East) (CIL). The firm has been the sole manufacturer of chlorine, caustic soda and other chlor-alkaline products in Singapore since 1963 and is the prime supplier of basic chemicals to the petro-chemical, pharmaceutical, electronics and water-treatment industries.
While CIL’s core business remains profitable, revenue has been on the decline in the past few years amidst the weakening of the global economy and the loss of several major customers due to the cessation of their operations in Singapore. Between FY12 and FY16, top line declined from $107 million to $78.4 million.
However, looking at the past five financial years, the company cash flow performance has remained positive. Operating cash flow stood between $5.6 million and $32 million from FY12 to FY16, while free cash flow was positive for four out of the past five financial years.
The strong cash flows have allowed the group to build up a strong balance sheet. Cash level doubled from $15.6 million at end-FY12 to $38.4 million as of 30 September. In contrast, total debts and total liabilities were only $10.3 million and $25 million respectively.
Despite the strong cash flows and cash level, we note that dividend per share remained relatively low from FY12 to FY15 at between $0.01 and $0.015 per share, which led to shareholders voicing out their unhappiness at the firm’s FY15 annual general meeting.
In a positive move for investors, the group raised normal dividends in FY16 alongside a special dividend of $0.05 per share. FY16 total dividend of $0.08 per share translates to a yield of 11.4 percent based on the close price of $0.70 on 16 December.
The company also took further steps to unlock value for shareholders via the issuance of a special dividend of $0.12 per share in 1H17 (paid out in November 2016).
While CIL’s core business appears to be dwindling, the strong cash generating abilities of its business should not be overlooked. Additionally, if we were to consider the group’s two investment properties with a combined book value of $39.8 million as of 30 September, shareholders holding shares at current price would seemingly be getting the core business for free.
Overall, the two stocks presented above have underlying businesses that are profitable and cash generative while at the same time pay out decent dividends.
One of the main concerns we have though is that like several other cash rich small cap firms, PNE and CIL shares have very low liquidity, something that investors have to bear in mind.