For investors, one of the best defensive moves (in a recessionary environment) is to buy dividend stocks. That’s because companies that pay dividends are usually producing healthy cash flows.
As my colleague, Billy, highlighted in a recent article, buying into companies with strong balance sheets and solid business models is key.
That’s because these balance sheets – and accompanying cash flows – ensure that investors are well protected during periods of uncertainty.
In a recession, a company that has solid operating cash flow and free cash flow is going to be much more resilient than one that burns cash. That’s because the former normally pay dividends.
Locally, if we exclude the big Singapore banks and REITs, where can these solid dividend opportunities be found for investors?
One such name, that not many investors think of, is electronics and life sciences manufacturer Venture Corporation Ltd (SGX: V03).
Here’s why I think the company offers investors both a promising dividend and potential shelter from any “coming storm”.
Promising first-half 2022
What many investors may not realise is that Venture has a range of customers across a variety of sectors.
These include Life Science Genomics, Healthcare Wellness, Networking & Communications, and Advanced Payment Systems, among others.
Its latest H1 2022 earnings really highlight its strength coming out of the Covid-19 pandemic.
For the first six months of the year, Venture posted revenue of S$1.79 billion, up 25.4% year-on-year. In fact, it’s nearly back in line with pre-pandemic figures.
In H1 2019, Venture posted revenue of S$1.83 billion.
Meanwhile, on the income side, Venture posted net profit of S$174.3 million in H1 2022. This was up 24.1% year-on-year, roughly in line with the revenue increase.
It’s also an indication that Venture’s profit margin held up in the face of rising prices. Indeed, that was the case as Venture’s net profit margin for H1 2022 came in at 9.7% – just a smidge lower than the 9.8% in H1 2021.
Sequentially, Venture’s business is also improving. In Q2 2022, its net profit of S$90.2 million was up 20.2% year-on-year but also increased 7.4% quarter-on-quarter from Q1 2022 (see below).
If anything drives the ability to pay a dividend, it’s a company’s cash flow. In this sense, dividend investors can sleep peacefully at night if they hold Venture shares.
That’s because Venture’s cash flows are solid. In the first half of 2022, the company generated operating cash flow (before working capital changes) of S$227.6 million. That was up from S$176.2 million in the same period in 2021.
Meanwhile, its cash position of S$704.3 million as of 30 June 2022 remains solid (see below). Admittedly, this is down from its cash position at the end of 2021.
However, this drop was partially attributable to Venture holding higher inventory to meet customer demand given supply chain constraints.
Encouragingly, its net asset value (NAV) per share continues to climb. All this allows Venture to pay out a solid dividend.
For the latest H1 2022, the company announced an interim dividend per share (DPS) of 25 Singapore cents. That was in line with the same period of 2021.
Based on its earnings per share (EPS) for FY2021, its dividend payout ratio was at a reasonable 70%.
Currently trading at around S$18.25, and based on a FY2021 DPS of 75 Singapore cents, Venture is offering a dividend yield of 4.1%.
A different kind of tech name…that pays a dividend
As with any technology sector name, investors tend to think of just “growth at all costs”. However, Venture Corp offers both growth potential but also a solid financial profile.
The company is working with companies across a spectrum of industries. Not only that, the firm also offers reliable cash flows and is somewhat insulated from China’s “Zero-Covid” policy.
That’s because nearly all of Venture’s manufacturing facilities are located in Malaysia and Singapore. While it’s not immune from supply chain constraints, this should help mitigate the uncertainty seen in companies with sizeable China operations.
Finally, with a well-covered dividend and robust cash flows, Venture can provide investors with some level of comfort during a period of market uncertainty.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Venture Corporation Ltd.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.