The information presented in this article is not to be construed as investing advise. Just opinion. Dr Wealth and its associates will not be responsible for your losses. Invest in your area of expertise. If you have none, find one.
The strategy used in this article is one half used to determine a part of the official Dr Wealth Portfolio, which is a Value/Growth based portfolio focused on Singapore, Malaysia, Hong Kong, and China. We have previously published case studies under here (growth dividend) and here (under-valued) . This article is simply one more extension of the application using our investment principles. Enjoy.
If you are a long-term income investor, it is important to look for companies with a great business model which allows them to ‘maintain a competitive edge’ and pay dividends for the long run. It would also be good to have a decent yield on top of that too.
Hence, after some research, we will reveal 3 SGX-listed firms which fulfil the below criteria:
- Great Business Model / Strong Economic Moat
- Impressive Return on Equity (ROE) above 20%
- Dividend yield above 3% (as at 30th Aug 2019)
- Established Dividend history of more than 10 years!
You may be wondering… “Do these companies even exist?!”
Well, you are in luck. In fact, they have already been listed in the market for more than a decade and are some of investors’ favourites. They are;
In this article, we will zoom deeper into their business model and the reasons behind why we think they enjoy some sort of a durable competitive advantage.
We will perform a comparison of their dividend viability based on the Dividend Growth Strategy, which ultimately seeks to find, assess, and buy growth stocks which pay us dividends along the way.
For a quick background, the strategy involves a quantitative approach to analysing stocks on the principle of balanced dividend pay-outs in comparison with the traditional approach of investing in high dividend yielding stocks that generally end up accumulating excessive debt in a low interest rate setting. You can read more about the strategy from our Factor-Based Investing Guide.
Without further ado, lets start the ball rolling.
#1 Vicom Limited (SGX: V01)
Those who drive in Singapore would be pretty familiar with Vicom Limited, a leading inspection and technical testing provider in Singapore with over 400,000 vehicle checks conducted at its domestic centres every year.
Over the last few years, the firm expanded its scope of business into mechanical, civil engineering, and biochemical industries where it offers an array of testing and inspection services.
On the International front, Vicom performs the role of an adviser/consultant, sharing its expertise with firms in Asia and the Middle East.
Vicom’s Economic Moat
All cars older than three years old in Singapore are required to undergo inspections by law. This forms the bread and butter of VICOM’s car inspection business. It is also the biggest player in this field as the company operates 7 of the 9 vehicle inspection centres in Singapore.
It isn’t hard to see that if every car in the country needs to undergo inspection and that if you own 7 of the 9 current inspection centres, you literally are sitting on a nearly impregnable fortress.
Hence, Vicom possesses not just one, but 2 economic moats gelled into one – regulatory requirements + largest market share of the vehicle inspection space.
On top of that, VICOM owns 2 distinct advantages over its competitors:
- Through its subsidiary SETSCO, Vicom has successfully branched out into non-vehicle inspection services as well. Further cementing themselves as the premier inspection firm with quality control, it offers a comprehensive range of testing, inspection and certification services to key industries such as Oil & Gas, Aerospace, Construction, and more.
- Vicom is also a subsidiary of ComfortDelGro Corporation Limited, the world’s second-largest land transport company. As such, it probably also benefits from the relationship with the parent company as they continue to lease out the biggest taxi fleet in Singapore and send them back to Vicom for the mandatory vehicle testing.
In a nutshell, Vicom’s business model provides recurring, consistent revenue which can well support the dividend payments for the long run. That said, investors should take note that the Singapore government has pivoted towards a car-lite society and introduced a “zero-growth” policy for the car population in Feb 2018, down from 0.25% in the previous three years.
#2 Singapore Technologies Engineering Ltd (SGX: S63)
Headquartered in Singapore, ST Engineering is a global technology group with diverse interests in aerospace, electronics, land and marine sectors. The group has a strong presence across more than 20 countries and employs around 22,000 staff across offices in Asia, the USA, Europe and the Middle East.
According to its website, ST Engineering owns a portfolio of world-class and award-winning solutions that can be found in the depths of the oceans and up in the vastness of space. And the company continues to invest in technology and integrate deep, multidisciplinary engineering expertise and capabilities to meet the challenges of tomorrow.
Singapore Technologies‘ Economic Moat
Any male enlisted in Singapore’s army would know that ST Engineering owns the subsidiaries that manufacture our own weapons and ammunition. One particular weapon that is close to my heart is the SAR21 which I train and treated it as my beloved ‘wife’ for the 2 years in army and reservist instances following that.
With a 49.7% majority ownership by Temasek Holdings, ST Engineering remains as Singapore’s leading defence conglomerate where no other company comes close. In fact, with a strong foothold in Singapore’s market, ST Engineering has been able to take its engineering expertise and capabilities overseas to secure contracts of mouth-watering valuations at $1.5billion and $2.1billion.
Moreover, I personally feel that the firm’s strong footprint in R&D domains such as smart cities, data analytics, cybersecurity, robotics and autonomous solutions makes it a commendable competitor among some of the leading defence manufacturers worldwide.
To end off, ST Engineering has a strong order book of more than $15.5 billion including the $2.5 billion in new contracts signed in the 2nd quarter of 2019. This gives clear revenue visibility for the next few years and also the dividends that will trickle in as well.
#3 Singapore Exchange Limited (SGX: S68)
Incorporated in 1999, Singapore Exchange Limited (“SGX” in short) is one of Asia’s leading multi-asset exchange with offices across Asia, London and the United States. The AAA-rated company is the world’s foremost international marketplace for benchmark Asian equities, commodities and currencies.
SGX operates 3 main business units: Equities and Fixed Income, Derivatives, and Market Data and Connectivity. The Equities and Fixed Income unit comprises Issuer Services, Securities Trading and Clearing, and Post Trade Services. The firm’s FY2018 revenue split can be seen below.
Singapore Exchange’s Economic Moat
Being the only stock exchange in Singapore, SGX is blessed with the most obvious economic moat of the 3 companies as mentioned.
Having such a monopoly enables SGX to generate strong operating cash flows with high net profit margins and a robust return on equity (ROE).
While things look good on the surface, SGX is facing several obstacles on the global front such as:
- The decline of Equities business as more people opt for passive investing; even DBS is shutting down the remisier business unit
- Stiff competition to woo companies for public listings against other global exchanges like HKEX, NASDAQ, ASX.
- S-chips stigma due to scandals like Midas Holdings, China Hongxing, China Paper and more.
To counter the above obstacles, SGX is investing heavily in technology to scale up its international coverage of equities and bond listings. It is also establishing new fundraisings private platforms like 1exchange on expectations of digitization of the fixed income market and mounting convergence of OTC and derivative markets.
On a positive front, SGX is expanding its derivatives segment to drive more growth for the company.
In a new development, SGX has partnered with National Stock Exchange of India (NSE) for a joint proposal to have trades in SGX’s popular Nifty futures contracts executed in Gujarat International Financial Services Centre, or GIFT City.
Simply put, Singapore investors can invest in India through the financial products moving forward.
To put things into perspective, we will perform a comparison of the 3 stocks and their dividend viability based on the Dividend Growth Strategy.
First of all, let’s look at Gross Profitability.
Robert Novy-Marx, a Rochester University professor, discovered that the Gross Profitability ratio offers an accurate way of determining future investment returns.
His empirical studies proved that stocks with high Gross Profitability can have equally impressive returns as with value stocks and documented his research in The Other Side of Value: The Gross Profitability Premium.
Gross Profitability = Gross Profit/Total Assets
Vicom emerges as the champion among the 3 with gross profitability of 21.6%. However, SGX comes close at 20.6% as well.
Next up, we look at the dividend yield and payout ratios of the 3 firms.
ST Engineering and SGX both displayed a pretty similar set of results but lost the battle to Vicom with its 7.48% yields. Even if we reduce Vicom’s payout ratio to 90%, the dividend yield will be around 5.8%, winning the other 2 hands down.
So which company would we go for if we have to pick one?
Even though the 3 of them have good economic moats and can continue to pay dividends, I would go for Singapore Exchange Ltd. (SGX) personally.
This is because as a savvy investor, I can best evaluate its business model compared to the other 2 (vehicles testing and defence contracts). Ultimately, I believe it boils down to investing in something I understand the most. You should too.
Something to note; in the recent decade, there have been greater and greater attention being paid to finance and investments as a method to grow personal wealth versus the traditional methods of property (which isn’t working anymore outside of specific cases) and career climbing (which has eroded in quality rapidly over the years). Singapore households on average have 4% of their net worth invested.
A lion’s portion of this 4% is made up by insiders of large companies holding enormous amounts of their own stock. This means as a whole, Singapore, as a country is under-invested.
Given the increasing shift in attention towards one’s own financials (investing among one of them!), I can only surmise this bodes good things for Singapore Exchange, provided they are able to attract more listings than delistings.
PS; We run an Early Retirement Masterclass based on dividend investing. You can check it out here. If not, we hope you’ve enjoyed the article!