As has been mentioned in a number of articles at Motley Fool Australia recently, finding a dividend better than your measly savings account isn't all that hard.
A number of companies go one better, and G8 Education Ltd (ASX: GEM) offers a staggering 7.2% dividend – paid quarterly – that also grosses up to a flat 11% including franking credits.
Many investors may instinctively shy away from such a yield, believing it to be 'too good to be true'. However, while G8's balance sheet does raise an eyebrow, the company's cash flows are in order and its dividend payments appear sustainable.
Here's what you need to know:
| G8 Education cash flow statement | 2015 half-year figures (in 000s of AUD$) | 2014 full-year figures | 2013 full-year figures |
| Receipts from customers | 305, 362 | 494, 744 | 274, 595 |
| Payments to suppliers and employees | (241, 934) | (383, 483) | (218, 783) |
| Net interest paid and borrowing costs | (8, 564) | (11, 321) | (558) |
| Tax paid | (19, 475) | (25, 224) | (12, 219) |
| Cash flow from operations | 35, 389 | 74, 716 | 43, 035 |
| Payments for purchase of businesses | (53,607) | (447, 751) | (98, 536) |
| Payments for property, plant, and equipment | (6, 833) | (16, 508) | (10,500) |
| Cash flow from investing activities | (60, 440) | (462, 617)* | (108, 202)* |
| Proceeds from issue of shares and bonds (net of costs) | 12, 629 | 474, 368 | 179, 919 |
| Dividends paid | (25, 433) | (33, 273) | (19, 232) |
| Repayment of borrowings | – | (46, 579) | (3, 514) |
| Cash flow from financing | (12,804) | 394, 516 | 157, 173 |
| Net cash inflows / (outflows) | (37, 855) | 6, 615 | 92, 006 |
*small line items have been left out to save space, which is why total cash flow doesn't equal the sum of the items above it
I have collapsed several items (such as interest received and interest paid) into one another for space-saving purposes but all above figures come from G8's 2014 annual report and 2015 half-year report.
Readers can see that the company has been aggressively growing its business through acquisitions, relying on heavily on finance and share issues to grow sales. While the total cash-flow picture is affected by big purchases and fundraisings, readers can also see that the company's quarterly dividend sits around 50% of the company's total operating cash flow.
The second half of the year is generally better for G8 as a result of the timing of enrolments, and I expect the full-year dividend (71% of first-half profit) to become a lower portion of full year profit. With $83 million cash at bank as of the latest half-yearly report, G8's dividend looks highly sustainable at this juncture – as long as management remains able to secure additional future finance for acquisitions.
G8 currently has corporate note debt of $486 million in mixed Australian Dollar/ Singaporean Dollar debt due in the next five years. I believe it is questionable as to whether the company can successfully repay all its debt in that time frame. Accordingly, G8 will want to obtain additional finance which could lead to the company paying substantially higher rates depending on interest rates and investor appetite for debt at the time.
As a result of all these factors, I conclude that G8's dividend looks highly sustainable at present, assuming ongoing access to finance and no major regulatory or structural changes to the childcare business. However, investors should be cognisant of these risks and recognise that G8 Education is not a 'set and forget' option for easy income over the long term.
