Vicom (SGX:WJP): This Singapore Share Giving “Risk-Free” Dividends?

You want to buy strong businesses that defy the law of capitalism.

When businesses grow bigger, more profitable, they attract more competitors. This causes profits to fall. Margins shrink.

Simply put, this is the law of capitalism.

For companies that defy the law of capitalism: they grow bigger, more profitable over time. They attract competitors. But these companies continue to grow despite competition.

Their business model and unique competitive advantage gives them a natural monopoly in their industry.

But I’m not talking about natural monopoly today.

Instead, there are companies that defy the law of capitalism because of a regulated monopoly.

Vicom Defies the Laws of Capitalism

I’ll explain.

Vicom Ltd (SGX:WJP) is the largest vehicle inspection business in Singapore. A market cap of S$700 million, Vicom dominates the vehicle inspection industry with a 74% market share.

Vehicle inspection is a lucrative business. You own a car, you need to send it to a licensed shop to certify your car is fit for driving. And you need to do this every year. If your car is more than 10 years old, you need to have it checked twice a year instead.

Vicom is one of the only two licensed operators that can inspect your car. Otherwise, it’s illegal to drive your car without an annual inspection.

And the government doesn’t issue these licenses to operators anymore. Since 1981, Vicom has a regulated monopoly in the vehicle inspection business.

In fact, Vicom owns 7 of the 9 approved inspection centres in Singapore.

Every year, you have more than 500,000 vehicles — taxis buses, trailers, commercial cars — going to Vicom to be inspected.

Even now, private hire vehicles and personal mobility device (PMD) need to go for a yearly inspection.

That’s a solid, steady stream of income for Vicom.

And this makes Vicom resilient to economic shocks.

Because of their license, no other competitors can enter this insutry. That’s how Vicom maintain its earnings power.

Over the past 10 years. Vicom invested a total S$84 million of capital investments. And that produced a massive S$280 million of net profits for the company.

Because it’s not a capital intensive business, Vicom can reward shareholders with abundance.

Vicom grew its dividends from S$0.043 per share in 2003 to S$0.459 per share in 2019.

Because of the COVID pandemic, Vicom reduced its pay out to S$0.243 per share in 2020. If you’d invested in Vicom since 2000, you’d collected over S$4 per share of dividends. Not counting share price gains since 2000, that’s 463% return on your initial share of S$0.71 in 2000. That’s impressive.

In its latest half yearly results, Vicom grew each revenues and net profits by 23% to S$49 million and S$12 million respectively. Its results improved from last year that management paid an half yearly dividends of S$0.03 per share.

What Do Growth Companies Have That Vicom Sometimes Lack?

But the problem is, there’s a ceiling to how much Vicom can grow.

You see, it’s hard for Vicom to grow beyond Singapore. Because the vehicle inspection business is regulated. And it’s almost impossible grow another massive inspection operation elsewhere.

Vicom has no where else to grow. And there’s only so many vehicles you can put in Singapore’s road.

That’s why when the number of vehicles to inspect dropped from 522,000 in 2015 to 468,000 in 2018, Vicom’s revenues dipped. Vicom’s shares dropped.

Vicom is a cash generative business, but it has no where else to deploy its capital. What does management do with all the cash? It returns almost all of what it earns to shareholders as dividends. Like a Singapore REIT.

That’s why you get a steady dividend rate year after year.

Over the past four years, Vicom paid, on average 105% of its cash out as dividends.

In a way, Vicom shares behave like a bond. It pays you dividends steadily. But there’s not much upside to its stock price.

Would I Buy Vicom Today?

The best time to buy Vicom is when there are more vehicles “de-regulated” off the road, like what happened during 2015 to 2017. This means less vehicles get inspected for the year, and a drop in revenues for Vicom. But don’t forget, Singapore is one of the most connected cities in the world. You still need buses, taxies and commercial cars to get around. And these vehicles all need to go for their annual checks. This makes Vicom’s business resilient.

That’s why, after the peak of the pandemic last year, Vicom’s 1H2021 financial soared. Vicom’s shares went up so much that it decided to split its shares up.

Disclaimer — I own Vicom since 2018.

Vicom defies the law of capitalism. It’s a regulated monopoly that continues to generate strong earnings. Unless its license is revoked, vehicles will always come to Vicom for inspection. 

This makes their revenues and earnings resilient. 

This makes their dividends “risk-free”.

Sometimes investing can be simple.

Always here for you, 

Willie Keng, CFA

Founder, Dividend Titan

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