In one fell swoop on the evening of 26 May 2016, King Wan Corporation Ltd (SGX: 554) transformed itself from a stock with a mouth-watering dividend yield into one with a sour 0% yield. That’s zero. Zip. Nada.
You see, based on King Wan’s closing share price of S$0.18 on 26 May, it had a dividend yield of 9.4% based on its dividend of S$0.017 per share for its fiscal year ended 31 March 2015 (fiscal 2015). But when it announced its full-year earnings for fiscal 2016 on 26 May after the market close, King Wan revealed that its dividend for the year would be zero.
That’s how the company changed from a high-yielding dividend stock into one with a yield of zero.
Lessons learnt
Investors tracking the company’s business progress may not have been very surprised. More than a year ago on 6 March 2015, I had already shared in an article how King Wan’s business fundamentals look poor (I had highlighted the company’s lack of free cash flow growth and its weak balance sheet) and that its dividends are at risk.
The article had used data only from fiscal 2014, when King Wan had dished out a dividend of S$0.02 per share. Turns out, the company’s dividend for fiscal 2015 was 15% lower, and we all know what happened to its fiscal 2016 dividend.
While King Wan’s free cash flow had spiked in fiscal 2015, you can see how the company’s net-debt had climbed, adding risk to the company’s future dividend at that point in time. It’s logical to think that the further negative developments in the company’s balance sheet in fiscal 2016 (the further increase in the net-debt level) may have played a big part in King Wan’s decision to eliminate its dividend completely.
A Fool’s take
King Wan’s experience is a reminder for investors that income investing goes way beyond looking at a stock’s yield. A careful study of the business fundamentals of a company is crucial. And when it comes to the fundamentals, the balance sheet is one key area investors may want to focus on.
