Venture Corporation

There are a few enquiries about Venture corporation as a dividend stock since it was added to my Dividend Stock Tracker.

The attractiveness stems from a 7.2% current yield, which represents a near 100% payout from last years earnings

Venture corporation is net cash, meaning debts minus cash they have zero debts

Based on past year’s earnings report the Price earnings is 13 times, EV/EBITDA is 8.5 times.

From this set of data, it looks like a good dividend stock.

I would like to provide more information to help you make a more holistic analysis. However, I have to say I have not immerse myself in their business of design and contract manufacturing. So a vita component of my usual analysis, which is the business side of things will not be covered.

Price History

Venture used to be a stock that fluctuates more around 15 dollars rather than current price. $9.65 looks a strong support which turned into resistance.

Holders since 2002 may not gain a good overall return on this stock, which will build the case whether tech companies like this have a place in your dividend portfolio.

Its high share price also reflect a better business climate where it was able to earn much favorable returns compare to now.

Still, if you decide to invest, the logical approach is not so much on what has happened in the past, but where the future will take you.

Business models change, not just in the tech industry. Just ask SingPost and SPH. Not really tech but facing the pressure from much cheaper and game changing substitutes.

This year’s earnings

What is provided on the Dividend Stock Tracker is based on past year’s earnings. However, the balance sheet asset, debt and cash information is based on the current 3 months end September quarterly report. (Read here)

Lets look at the balance sheet.

Receivables at 414 mil matches Trade payables at 310 mil so nothing too alarming there.

Total debt amounts to 169 mil. Current cash and cash equivalent is 433 mil. This means that Venture is net cash of 264 mil putting it in a very healthy position

However, it is to note in the past 5 years, Venture’s cash hold exceeds 500 mil.  They have spent the past 5 years paying down their total debts of 500 mil to this current debt level.

Lets look at the cash flow.

This is where we forecast the ability to pay dividends using the cash flow from Venture’s core business.

It is generally not a good idea to forecast a full year earnings with only 9 months of data. This is because cash usage and earnings may fluctuate as business cycle may go through peak periods and down periods.

9 months cash from operating activities come up to 95 mil versus 167 mil this time last year. This shows a dramatic drop in cash flow.

Purchase of plants and properties is 8 mil versus 21 mil in the previous year.

Thus free cash flow is 87 mil versus 146 mil.

Its hard to extrapolate how much they will bring in the next quarter but the analyst are forecasting it to be much better.

Assuming they are able to add 40 mil in 4th quarter cash flow to 87 mil, that will bring the figure to 127 mil.

To pay out their latest enticing $0.55 dividend they would require 155 mil.

This shows that perhaps this year’s free cash flow may not be adequate to continue to pay that dividend.

It is worth to note that in the past 5 years, Venture had a free cash flow in 4 of the years that exceed this dividend amount. The only year was in 2010 which is reflective of 2009 results where their free cash flow was only 35 mil.

Past dividend history

2002 – $0.025
2003 – $0.0375
2004 – $0.1825
2005 – $0.50
2006 – $0.50
2007 – $0.50
2008 – $0.50
2009 – $0.50
2010 – $0.50
2011 – $0.55
2012 – $0.55

As the share price go down the dividend payout from venture looks to increase. Since 2005 the dividend have been a consistent 50 cents.

This may be what attracts investors.

Given this payout history, unless there is a dramatic deterioration of business outlook for the next 5 years, Venture are likely to go on this dividend policy.

The prudent way is of course to pay out of net earnings earn yearly, which would result in dividends fluctuating..

It is likely the 10-20 mil to fulfill the 55 cents dividend will come from debts.

Conclusion

I think this company can be a good dividend stock, but as a tech company, my view is that they should be paying out a lower % of earnings as dividends.

Since a tech company needs to invest well to keep their competitive edge sharpen, a lower payout ratio and having more in cash coffers would be sensible.

However, that would mean a lower dividend yield. Give or take, if venture deploys cash better than us and make use of their 10% ROE, we could see our dividend grow decently.

Would love to hear the perspective of folks familiar with Venture’s business

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.