SI Research: 3 Dividend Stocks To Insulate From Global Trade War

Geopolitical uncertainty is back again. In the US, despite wrapping up what was a really strong earnings season, stocks succumbed to pressure when President Donald Trump announced tariffs on imported aluminium and steel.

In a knee-jerk reaction, the EU – one of US most important allies and trading partners – has threatened for a levy on digital revenues, in its effort to raise more taxes from American tech giants. Globally, investors are cowering in fear that the opening salvos are just a prelude to what could potentially reverberate into a full-scale trade war.

As geopolitical risks heighten, Shares Investment thinks it is best to pick up stocks that are insulated from the global trade fallout. At the same time, these stocks should consistently deliver income to investors in the form of dividends. Here are 3 dividend stocks that we recommend to de-risk your portfolio.

SBS Transit Holdings

Without the need for much introduction, SBS Transit (SBS) is the operator of public transportations for public SBS buses and the mass rapid transit (MRT) for North East Line, Downtown Line and light rail transit system for Punggol-Sengkang LRT line.

In 2016, the Singapore Government migrated the local bus industry to a bus contracting model (BCM), whereby all ownerships of public bus infrastructures including buses, depots and interchanges were “taken over”. In return, operators are paid a fixed fee to ply services.

Mostly owing to the transition to the BCM, SBS delivered much stronger profitability. In FY17, SBS reported net profit of $47.1 million on revenue of $1.2 billion, representing a 50.3 percent jump in the bottom line! For the year, SBS declared final dividend of $0.0395 to bring the annual dividend for FY17 to $0.076 per share. Cum-dividend, the SBS is now trading at about $2.60, translating to a yield of 2.9 percent based on trailing 12-months period.

Just last month, in February 2018, the Land Transport Authority (LTA) announced that it would buy over SBS-owned operating assets for the North East Line and Punggol-Sengkang LRT line. Under the new rail financing framework, SBS will be relieved of costs of making the capital investments in operating assets for the rapid transit system network. In addition, the new framework will also have a fare-sharing mechanism where LTA will share some of the shortfall in revenue and profits when fare growth fails to keep up with costs.

Notwithstanding that, SBS recently landed on $472 million deal to run 18 bus services in Bukit Merah area for a 5+2 years period. In all, SBS will likely see a significant boosts in financial performance in FY18. Along with a payout ratio of just about 50 percent, SBS definitely has much room to raise dividends going forward.

VICOM

Every car owner in Singapore would probably know VICOM, a vehicle inspection company in Singapore. Mandatory periodic vehicle inspections in Singapore mean a steady and recurring business for VICOM.

In a landscape that inspection fees are fixed by regulation, absence of pricing advantages means that the one with most scale wins. In our vehicle inspection industry, VICOM has the most extensive network, operating five out of nine inspection centres located in Singapore. Owing to that, VICOM commands market leadership, dominating roughly 75 percent of all vehicles being inspected in its centres.

Lesser known to Singaporeans, VICOM also provides non-vehicle inspection and testing through its subsidiary SETSCO, in which they inspect and test the feasibility of any structures, machineries and materials before they are used.

In FY17, VICOM reported net profit of $26.9 million on revenue of $97 million, representing a slight fall in top line of 4.1 percent and bottom line of 5.8 percent. The group declared a final dividend of $0.2288 to bring its annual dividend for FY17 to $0.36 per share. This represents a trailing 12-month yield of 5.8 times on its current share price of $6.18.

Despite the earnings dip, VICOM annual dividend payout aggregate to $31.9 million, representing a payout ratio of 120.4 percent. That said, this is probably due to the fact that VICOM is sitting on a huge cash pile of $107.5 million as at the end of FY17.

800 Super Holdings

One of the four solid waste management and cleaning service providers approved by the National Environment Agency, 800 Super Holdings (800 Super) provides waste collection services for the residential and trade premises in Ang Mo Kio – Toa Payoh sector and also public cleaning services for the North-west and South-west regions in Singapore.

In January 2018, the company was further awarded a $193.5 million public waste collection contract for Pasir Ris – Bedok sector, for a period of 7 years and 4 months. Such long-term contracts awarded by the public sector is the reason why 800 Super’s business is so resilient.

In its latest 1H18 result, 800 Super’s net profit fell 15.8 percent to $6.9 million mainly owing to revenue falling 3.4 percent to $76.1 million. The company attributed the poor performance to more competitive prices for contract renewals. Adding a little more disappointment, the company did not declare interim dividend for 1H18 compared to $0.01 dividend per share last year, as its cash position shrank to $7.4 million from $25.7 million in FY17.

It should be noted thought that the negative free cash flow in 1H18 was due to a $32.5 million used for the additions of property, plant and equipment in relation to the construction of 800 Super’s waste-to-energy (WTE) plant and sludge treatment facility. This was also reflected by higher depreciation expense that rose 7.4 percent in the period.

On the bright side, the WTE plant was completed as at end of 1H18 and is expected to be operational in 3Q18. Meanwhile, the sludge treatment facility is also on track for completion in 4Q18. These means less cash will be utilised for construction activities, in addition to the fact that the two projects would begin to drive earnings growth for 800 Super going forward.

Given that the company has paid out dividends consistently since 2011, we believe distribution will resume in end-FY18. Last year, 800 Super paid a final dividend of $0.03 per share for FY17. Assuming it maintains the payout, the stock still offers a decent yield of 2.7 percent at the current share price of $1.13.