Design Studio, one of Singapore’s leading premier furniture manufacturer with core businesses in furniture and interior fittings, announced its full year results recently.
They may not have an extremely popular household brand name that you often hear on the street, but you may want to take notice of this company given its strong earnings and dividend yield and a strong balance sheet with no debt profile.
What has caught the eye for many investors is the management generosity with their dividend policy over the past few years. This financial year was no exception. For the financial year ended 2014, they have once again announced a dividend of 6.5 cents (0.02 Final + 0.04 Special + 0.005 Interim) which translates into a dividend yield of 13.8% with their previous closing price at 47 cents before the announcement was made. The stock price rocketed to a high of 55 cents which still translates into a 11.8% yield for investors who are a sucker for dividend yield before retreating to around 53 cents. The question now is whether we will see this as a recurring dividend yield play rotation for a company which is relatively doing well on its core business.
If we are looking at this from a trader point of view, this can be a quick hit and run play as I will explain later.
However, if we are looking at this from a business and investor point of view, we want to ensure that the dividend payout to shareholders is sustainable for the long run so that both company and shareholders can reap the benefit from the business they are operating.
If we take a look at the table appended below, I have summarized the important metrics you need to look at for the past 3 year results.
This is a company that has generated good earnings yield consistently because of the business moats they have built up over the years and the best part about companies operating in such manner is the very low capital expenditure they are required to fork out to fund the business. As a result, free cash flow yield remains very high and the company can pay out a good high dividends to shareholders while maintaining the rest of the earnings to strengthen their balance sheet at the same time. A Winner’s characteristic.
However, do take note that in 2013 the payout is much higher than their earnings so I am still a little skeptical about how conservative the management is trying to play out with the shareholders here. I would rather they do it the Vicom or Kingsmen way, slow and conservative but more sustainable.
Balance sheet remains solid with cash equivalent increasing to $48 million from $44 million last year and the company has zero debt on its book.
Comparison Play with a More Conservative Management
I would like to take a moment here to compare Design Studio against companies whose management is rather more conservative in distributing dividend payouts.
If we take a look at the table appended below, it appears that Design Studio has the best earnings yield amongst the three. This means that the price to earnings ratio for the company is the lowest as compared to the other two, which is at around 12x and 18x respectively.
The interesting observation about their identical requirement for the three companies is they require very low capital expenditure maintenance due to the nature of their service business. In other words, they are providing a service to customers which means that salary is probably their largest overheads. Contrast this to the machineries or telco industries and you get the idea. The free cash flow yield for these companies is therefore very similar to the earnings yield they have.
Design Studio pays out more of its earnings as dividends as shown through the payout ratio metrics. This enable their stocks to rise much higher upon the announcement than the other two which is more conservative. This may not be a bad idea overall if the management is unable to use the cash available to generate a high IRR. The other two are more conservative in the payouts which means that more earnings are retained back into the business or as cash or as working capital requirement.
The other interesting to note about this is the amount of cash as a percentage of their total assets. Obviously, if the company distributes more of the earnings as dividends, they will have to retain very little in their books. For investors, they would obviously love the company to distribute a higher dividend back to them as seen from the market share price movement. Depending on how you see this, there is a downside to this of course.
Playing this the Trader’s Way
I do not generally recommend that you do it this way, but I guess for those who are trading a quick in and out playing this stock could consider this method.
|Design Studio Stock Chart|
We already know that the management is rather generous in distributing dividends back to shareholders. The idea is to keep a close lookout on the Q1 to Q3 YTD earnings and see if their earnings for the full year would keep up and warrant the management to dish out the special dividends again. The hint is probably in the earnings yield and free cash flow yield and if they remain consistent then expect the management to do the same again. You can exit once the company announces the full year and dividend announcement results and profit from there, just like what had happened again for this year.
This will be on my watchlist.
I have not done an extensive research on the qualitative factors on the company so it will be a while before I would invest in the company. The balance sheet is rather strong though the management seems eager to distributes a whole lot of earnings back to shareholders, which become a subject for higher volatility for the stock price. This can also be bad especially since shareholders are accustomed to the high dividend yield the company pays out over the past few years and in years where earnings are poor, dividends would be severely cut as well.
What about you? Anyone have other thoughts on this company?