Straco Corporation (SGX:S85): Is the 4.76% Dividend Yield a Trap for Long-Term Investors?

Straco Corporation (SGX:S85) currently offers a dividend yield of 4.76%, a figure that has drawn income-seeking investors to its shares. However, beneath this appealing surface lies a stark contradiction: the company's Return on Capital Employed (ROCE) has plummeted from 18% to just 3% over the past five years, according to analyses. This article examines whether Straco's dividend sustainability is a mirage—or a legitimate opportunity—given its deteriorating profitability metrics, stagnant capital returns, and structural vulnerabilities.

The Dividend Attraction: A Near-Term Siren Song

Straco's dividend yield of 4.76% stands out in a low-interest-rate environment, especially for investors chasing income. The company has maintained a consistent dividend policy for 18 years, most recently paying S$0.02 per share in 2024. However, this yield is not without costs.

The dividend's sustainability hinges on Straco's ability to generate stable cash flows. Yet its net income has been volatile, swinging from a S$975,500 loss in 2020 to a S$38.09 million pre-pandemic peak in 2019. While 2024's net profit rose to S$27.22 million—a 6% increase from 2023—the underlying trends suggest fragility.

The ROCE Crisis: A Red Flag for Capital Efficiency

The decline in ROCE from 18% to 3% (per analyses) signals a critical breakdown in Straco's capital allocation strategy. ROCE measures how effectively a company uses its capital to generate profits, and a sustained drop to near-zero levels is a warning sign.

While Straco's ROE (Return on Equity) has fluctuated between losses and modest gains (e.g., 10.3% in 2024), this metric is distorted by leverage and equity changes. ROCE, by contrast, focuses on operational efficiency. Straco's reliance on tourism-dependent attractions—such as Sentosa's oceanariums and Ferris wheels—has left it exposed to external shocks like lockdowns and economic downturns.

Key Issues:
1. Tourism Dependency: Over 70% of Straco's revenue comes from attractions tied to tourism, which remains volatile post-pandemic.
2. Margin Pressures: Despite a consistently high gross margin (~98%), EBIT margins have swung wildly—from -3.3% in 2020 to 43.8% in 2024—highlighting operational instability.
3. Stagnant Capital Employed: The company's capital base has barely grown, yet ROCE has collapsed, suggesting poor reinvestment opportunities.

The EPS Dilemma: Growth? What Growth?

Straco's EPS (Earnings Per Share) has declined in recent years, even as it recovers from pandemic lows. Pre-pandemic, EPS peaked at S$0.29 in 2017, but by 2024, it stood at just S$0.22—a 24% drop.

Analysts project further stagnation, with 2025 EPS forecasts hovering around S$0.21–S$0.23. This lack of growth underscores a critical flaw: Straco's business model is not scalable. Its capital-intensive attractions require high fixed costs, leaving little room for margin expansion when demand fluctuates.

The Risks: Why This Isn't a "Buy and Hold" Play

1. Tourism Volatility: Straco's fate is tied to Singapore's tourism recovery. A slowdown in visitor numbers—due to geopolitical tensions, economic recessions, or new travel restrictions—could trigger another earnings collapse.
2. Dividend Sustainability: With net income volatile and ROCE near zero, Straco's dividend may be unsustainable if profits dip again. A cut would likely trigger a sharp sell-off.
3. Capital Allocation Failure: Straco's ROCE decline suggests it cannot reinvest in high-return projects. Its capital is “trapped” in low-growth assets, making it a poor long-term bet.

Conclusion: A High-Risk, Low-Return Gamble

Straco's 4.76% dividend yield is tempting, but it comes with significant risks. The ROCE collapse and stagnant capital efficiency highlight a business model in decline, while tourism dependency and margin volatility create a high-risk profile.

For income investors, Straco's payout offers short-term gains but no margin of safety. For long-term investors, the lack of earnings growth and capital efficiency makes it a speculative play at best. Unless Straco can reverse its ROCE trend—a feat requiring transformative business changes—it is better to allocate capital to companies with sustainable returns.

Actionable Takeaway:
- Avoid Straco for core portfolios.
- Only consider it as a speculative trade with tight stop-losses.
- Prioritize firms with high ROCE (e.g., >10%) and durable earnings growth.

In a world of competing opportunities, Straco's dividend is a siren song—sweet to hear but perilous to follow.

Final Note: Always conduct your own research and consult with a financial advisor before making investment decisions.