The Motley Fool

CLP Limited: Can it Keep Paying a Sustainable Dividend?

CLP Limited (SEHK: 2) is an investor and operator in the energy sector within the Asia-Pacific region. The group owns power generation, transmission, and distribution businesses as well as retails gas and electricity.

As of 30 June 2019, CLP has close to 24,000 MW of generation capacity with over 15,900 kilometres of transmission and high voltage distribution lines. The group employs around 7,700 employees across the Asia-Pacific region.

CLP has been the dominant electricity supplier to Hong Kong, providing power to 80% of the city’s population. Its business has, over the years, spread far and wide across many countries such as China, India, Australia, and Taiwan. Boasting a diversified portfolio, the group has been able to pay out a consistent quarterly dividend, one of the few Hang Seng Index component stocks to do so.

Investors may wonder – does CLP have a business model that allows it to continue paying a sustainable dividend? Let’s look at three key aspects of the group to determine this.

Nature of the business

The first aspect I looked at is the nature of the business itself. CLP holds stakes in utility assets in many countries. Many of these assets are regulated and generate a stable, consistent return for the owner.

The nature of utility assets is that they are boring, but predictable and dependable. Such assets are also recession-proof, as people still need electricity and water when there is a downturn. Hence, the nature of CLP’s business ensures that the business can carry on churning out cash through all kinds of economic conditions.

Free cash flow

The second aspect I looked at was the free cash flow (FCF) generation ability for CLP. From the table above, it can be seen that CLP generated consistent FCF for the last five consecutive years.

Stable FCF generation is the hallmark of a great dividend company, as this means that there is sufficient cash flow left over to fund dividend payments.

Dividend history

The final aspect I looked at was CLP’s dividend history. Investors should note that CLP has been consistently increasing its annual dividend per share, to the tune of around 3% to 4% year-on-year. The steady increase is a testament to the stability of CLP’s portfolio of utility assets, and the resilient and increasing cash flows generated by these assets have contributed to the higher dividends over time.

For H1 2019, CLP has once again raised its quarterly dividend to HK$0.63/share, up from HK$0.61/share a year ago, for a 3.3% year-on-year increase.

Foolish bottom line

From the above observations, I am confident that CLP can continue to pay out a sustainable dividend to shareholders. The strength and diversity of the group’s portfolio of utility assets contribute to cash flow stability even during tough times.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang doesn’t own shares in any companies mentioned.