Is This Singapore Stock’s Dividends Sustainable?

Not all Singapore dividends stocks are the same. 

Some stocks pay small dividends, but grow them fast. 

Some stocks pay large dividends, yet their businesses are struggling.

You want to be careful of the latter.

Yangzijiang Shipbuilding (SGX:BS6) is a shipping giant. Its share price ran up 64% since the low of November 2020. 

And what’s impressive is it announced a strong first quarter financial results.

It reported a massive 89% earnings growth and collected a huge order book of US$6.6 billion.

 And it generated CNY6.5 billion of free cash flow.

The next question I ask myself… 

Can I buy this Singapore dividends stock?

For 60 years, Yangzijiang transformed itself from a small shipbuilder to one of the biggest shipping empire in China.

One great thing about this company — it survived many market cycles to become a giant in one of the oldest industries in the world.

Ships — containerships and bulk carriers carry your electronic products, food, commodities across oceans. 

The very same vessels that Yangzijiang design, build and sell to shipping firms.

When Yangzijiang IPO in 2007, it grew to be come now of the 30 largest Singapore companies. 

Yangzijiang paid steady dividends year after year.

But I’ve learnt one thing about investing.

There’s some business you should almost never buy

And shipping is one of them.

Building ships are like properties — only more notoriously volatile.

Ships are expensive to build — You need a huge space, hire many staffs and buy raw materials for the vessels. 

And shipbuilding takes a long time to complete. 

So, you have to make sure that your buyers will pay for your ships — whether there’s a crisis or not. 

If your buyers decide to cancel their orders? 

You get stuck with a fleet of unsold vessels. That’s what happened to many shipbuilders which went bust overnight.

Now, what’s different from properties is that ships go down in value over time. 

Just like our cars on the road. 

On the other hand, you’ll almost be certain that properties go up in value over the long term. 

It’s just the way the market works.

So, when the whole shipping market crashed years back, there are tons after tons of ships lying around. These days no one wants ships anymore.

Did you remember how NOL struggled? The company was in the middle of a bad market cycle.

This is a “supply glut” in shipping.

In fact, I worry about smaller profit margins with shipbuilders — especially when I combine a “volatile” ship market, huge capital costs to produce ships and a huge staff force. 

It’s a recipe for high risk. 

And that makes Yangzijiang a tough business.

Like the commodities business, this industry is filled with booms and busts.

That’s why this shipping giant’s gross profit margins have fallen from 31% in 2011 to 18% in 2019. 

In 2020, gross profit margins was 28%. But that’s also because last year it managed to sell more containerships that have higher gross profit margins.

And as the world continues to deal with a shipping “glut, profit margins will contract. 

I expect Yangzijiang’s margins to be depressed.

It can be frustrating for Yangzijiang.

Not all Singapore dividends are the same

Everyone expects the shipping cycle to turn.

Share prices (and dividends) would be moving up for shipping stocks. 

Yangzijiang would be the best way to take advantage of this. 

But the problem here is, the cycle hasn’t turned as quickly as I though it would.

So, Yangzijiang must find a way to either evolve or simply move on to another business. It did. 

But it chose to become a money lender. 

Yangzijiang lent out more than CNY15 billion of its money at a high interest rate (classified as debt investments) — rather than reinvest or transform its business. 

And they have been growing this amount year after year. 

This shipping giant does not have expertise in lending money. And it’s still struggling to manage its shipping business. What would I get out of a business this way? 

I’m not sure.

You still need to move your goods around. You still need a cheap form of transport. There’s still demand to rent a ship to move your products. 

But shipping is not a miracle business. And ships aren’t that valuable these days anymore. 

I think the shipping business is going to hang around for now. 

But will this Singapore blue-chip dividends be sustainable in the future?

I’m not betting on that. 

And if I want to carefully manage my retirement portfolio, I’d want to understand more about the shipping business deeply. 

Sometimes, investing can be simple.

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