In late 2022, I made a big decision (Diligence members will know this) – I sold all my SATS shares.
See, I liked the business for many years. SATs has always been a solid dividend payer.
But something changed.
That year, it bought Worldwide Flight Services (WFS) for S$1.7 billion. Years later, shares SATs have climbed 20%. At one point SATs traded close to S$4.00/share…
Credit: Google Finance
So… Was I wrong about SATS
Let’s unpack this.
SATs was a dividend gusher
SATs was born to support Singapore’s fast growing airline industry. Over the years, it became one of the biggest freight and logistics handlers in Asia.
At its peak, it grew from S$1.7 billion to S$1.9 billion in revenues between 2011 and 2020. That’s strong, steady growth.
Its net profits? It grew from S$191 million in 2011 to S$248 million in 2019 (profits got hit in 2020).
But what I really liked was this: SATS was an asset-light, highly capital-efficient business. It doesn’t need to invest in heavy factories, buildings or equipment.
By 2019, it was producing an impressive ~15% ROE. Not bad. It was earning 15 cents net profits for every dollar reinvested back into the business. What’s more, it paid good dividends year after year.
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COVID-19 pandemic hit — Everything changed
When the COVID-19 pandemic hit, the airline industry went into cardiac arrest.
Overnight SATs pivoted, borrowed debt and bought worldwide Flight Services (WFS) for S$1.7 billion in September 2022. On paper, this made sense: WFS is one of the world’s largest air cargo. And this gave SATS huge leverage to become a global cargo handler – more countries, more customers, more profits.
Well, I wasn’t sure.
WFS wasn’t exactly a highly-capital efficient business. It generated strong revenues but has pretty volatile profits — EBITDA fell between 2018 to 2020 and only had a spike in 2021 back then.
In some ways, you could tell it was struggling with profitability.
Credit: SATs/WFS Acquisition Presentation Slides
Before the pandemic, SATs made an average S$250 million net profits per year. It had decent ~14% net margins.
After buying out WFS, SATs grew its revenues 3-4x bigger. Yet, last year, it only produced S$244 million net profits.
In other words, revenues were up. Net margins dropped.
Tricky problem. Tricky problem.
In the long run, the stock market is a weighing machine — Share prices will follow high-quality earnings.
Despite its acquisition, SATs operating model became more capital intensive.
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How I invest for dividends
So far, it has yet to produce the high net profit margins it deserves. It’s no longer the type of asset light business I used to invest for dividends.
You see, I never liked the idea of buying a company from a private equity firm. Back then, SATs was buying WFS from another private equity firm, Cerebus Capital. You never know how these deals would turn out.
Recall Warren Buffett’s mistake when he bought Kraft Heinz from 3G Capital, a Brazilian private equity giant in 2013. Buffett paid a 19% premium on Kraft Heinz shares, only to realize Kraft Heinz had to write down heavy losses of over US$15 billion later on.
Massive acquisitions usually have:
- Business complications
- Not understanding new markets well enough
- Not having true expertise to grow the combined businesses.
Having worked as an analyst previously, I’ve seen huge acquisitions seldom take off.
Shares of SATs have gone up since I sold them. But I’ve also learned not to judge a decision only by short-term share price moves.
Because, in the long games what’s crucial is this:
- Is the company growing revenues AND net profits.
- Does the company continue to have a capital-efficient model with a durable competitive advantage?
- Has the company’s operating model changed?
As a dividend investor, these are the hallmark of a durable business that will pay you consistent, growing dividends in the long term.
Here’s the other thing: I look for capital efficiency. This means companies must be able to produce equity and get back the high returns. This way, it’s sustainable and you can expect a more powerful way of dividend payout.
Dividend investing is about buying strong, high-quality businesses that can compound profits and dividends over time. Ones that don’t need too much capital.
Buying Worldwide Flight Services has changed SATs business model, though it has the potential to capitalize renewed growth of air travel.
My final thoughts
So… Was I wrong about SATs? I sold all my SATs shares because business has changed fundamentally. It wasn’t as efficient as before. Profits looked less predictable. That’s not the kind of company I want for long-term dividend investing.
Having said that, what would change my mind investing in SATS for dividends? Improving net profit margins, consistent positive free cash flow and growing dividends. This will allow me to relook into the business again.
In the short term, share price moves reflect the market’s emotions. Sometimes you’ll be “wrong”. Sometimes the market will prove you right only years later.
What matters is the reason behind your decision. That will ultimately determine how well you’ll grow your dividend portfolio.
Until then, I’ll keep searching for better dividend-paying stocks.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
You are absolutely right about selling SATS. The businesss transformed with WFS acquisition and the company did not indicate on IRR hurdle rates. Cash flow is even lower due to leasing commitments.
Hi Elliott,
Good point — I didn’t look at the acquisition’s hurdle rate. Back then, I was focused on trying to understand the target company and its financial track records.
If SATs is able to improve its efficiency, it’s worth re-looking into the business.
Cheers,
Willie