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.
Dividend Sustainability
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.
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| 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.
Conclusion
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?
hi, casting a wider net now? lol. enjoy reading ur post! nicely written. how do u feel abt the comany is closely held by a pareant called depa? i just checked it on sgx website. seems parents holding 90%
Hi Richard
Thanks for highlighting.
I didn't quite know about having such a low free float but I guess that's not really something which I like as the minority "can" get disadvantaged in many such cases. But for this particular one, I really have no further information on myself. I think someone else who are vested with this stock can advise us better on that 🙂
Nice find B! This stock is also in both my watchlists – new and old! I think it is a pretty overlooked counter. Likewise, I haven't delved deeper into it's business and looked at it's financials yet, so I haven't pulled the trigger. But I do think like the looks of it!
Hi GMGH
Put on one side first and relook at it during some correction. Hehehehe
What's the yield like when you strip out the special dividend? Would it fall to around 4-5%? If so, would this make this more, or less attractive, compared to Kingsmen Creatives?
Also, how did Design Studio fare during the last crisis? Was it severely affected or did it manage to sail through relatively unscathed?
Thanks!
Hi MW
"Special" dividends look to be abused these days, somewhat similar to our discretionary bonus. It is as if everyone was expecting it and doesn't treat that as a one-off. The effect is when they are cut, the impact is still going to be huge.
I didn't really check out their performances back during the GFC to be honest. But I think it will be a good indication to serve as a notice for serious investors vested in this counter. The cash there should serve as a nice buffer meantime though.
Hi B, thanks for the head up, something to research on and keep in radar.
Btw, nice post aboit the Valentine meal. Will bring me wife there at a opportune time. Is it very crowded and need very "advance" booking?
Hi Sillyinvestor
You're welcome.
The restaurant is not very crowded, but if you would like a private room, I think it's better to make at least a week reservation for margin of safety 🙂
B,
Don't you feel payout ratio of 80% will give less room/capital to invest or expand?
I guess I'm not familiar with Singapore stocks, but it seems silly to give it all back to investors and not keeping the cash for oppotunities.
Hi Vivianne
Thank you for your time visiting the blog.
Nice observation there. You are right, a lot of companies give out a pretty high payout ratio because of the pressure to increase their dividend yield over the years. This way, they retained very little earnings to grow the business, which is why growth is much slower than the blue chips in the US. 🙂
Hi B, that is a very attractive dividend yield! I should really start looking to stocks other than Canadian and US equities.
Hi Jeff
The dividend yield in Asia stock is pretty attractive as compared to the US and Canadian equities, having previously invested in them in the past. They are also not subject to witholding capital gain and dividend taxes when an individual received them.
No one escape from Uncle Sam. Any gain from oversee has to be taxed as capital gain. In fact it's a big thing going on over the last 3-5 years now. The US is making the Swiss banks to disclose our citizen banking amounts. So, nope still subject to taxes.
Thanks Vivianne.
Thats indeed a big problem, somewhat similar to why Apple doesnt bring in their capital back to the US.
Hi B,
Good article there. Was wondering how you get PE ratio of 12x and 18x from the table. Thanks for the recommendation though 🙂
Hi Secretinvestors
The PE ratio is just an inverse relationship with the earnings yield 🙂
Thanks for the reply. I guess there's some minor calculation error in the post about the PE of 12x and 18x 🙂
Thanks for the reply. I guess there's some minor calculation error in the post about the PE of 12x and 18x 🙂
I have never heard of this company before. As a general rule of thumb, I try to avoid penny stocks or just any stocks that trade at less than $10. One of the principle rules from William O'Neill's How to Make Money in Stocks.
Hi Investing on Track
This is unlike most of the US stock out there where you are able to purchase 1 share. The minimum to purchase is 1000 shares and only recently they slack it downwards to 100 shares. So we are looking easily at around $500 per lot.
Penny not a problem usually thats where the gem is. Bluechip is too commercialized at least over here.
very good read, thanks
Thanks Felix.
Hi B,
Great find on this counter! My only concern is the liquidity issue of this counter. It seemed to have lost almost all of its liquidity since August 2010. Any idea why the sudden lost in so much liquidity?
Hi Aloypro
Thanks.
The liquidity issues I guess is due to the relatively free float outstanding out there. Based on Richard and MW, the free float is only at about 10% so thats why liquidity is pretty low.
Looking at the past 5 years, revenue has increased dramatically for the last 2 years, but both operating and net income has decreased instead. I think the drop in net margin needs further investigation.
Hi Goh
Agree here.
There is probably some competition riding up for this so the profit margins will be key to this.
That sounds like a fantastic dividend yield if it can be sustained. Unfortunately I've found that many businesses I invest in with really high dividend yields turn out to be value traps that can't sustain the dividend because business isn't going so well….
Hi Jason
Due to the nature of their business, they are unable to expand as aggressively as the other industries. I think as long as they are able to keep with their profit margins there, it should still be good given the high earnings yield ability and a clean balance sheet.
Hi B, just checking if you will review this company again soon? Thanks!