Starhub – Is the Dividend Yield Sustainable?
Many months ago, I wrote about the sustainability of dividends. Click on this link to view the article.
Recently, I had the time to review some of the telco underlying business and I questioned myself whether can they afford to continue paying the dividends. I will focus on SingTel and Starhub since M1 will be privatized soon.
A rule of thumb is: when something appears good, it is too good to be true. Of course, there are some exceptional cases.
For dividend-yield stocks, don’t be tempted by high yield. High yields are meant to compensate for high risk in the businesses.
Recently, there are two companies that gave high yields previously. But the businesses deteriorated and the yields were being cut. The two companies are Lippo Retail Trust and Asian Pay TV Trust.
Lippo Retail Trust had a yield of close to 10%, but in recent times, the share price fell more than >50%.
Gain: 10% in yield
Loss: 50% in share price
Net: -40%
You’re not better off.
In the quote below, you can click on the link to see what my friend wrote about Asian Pay TV Trust too.
The warning then would have told you, there is a price to pay for that high dividend.
Usually it is not sustainable.
The best way to tell dividend sustainability is to check its free cash flow over a period versus the dividend income it pays out to the shareholders. The free cash flow should cover the dividend. And the free cash flow should be either keeping inline, or growing.
APTT have shown clear signs that it isn’t.
The Secret for Stable Dividends?
The key is finding companies where free cash flow per share exceeds the dividend per share. That is the key to sustainability. That’s the formula.
Source: Morningstar.com
In FY13, FY14, FY15, and FY16, the dividends were S$0.20 per year yet we see its free cash flow per share falling short of that. Hence, in FY17, the dividends were reduced from S$0.20 per year to S$0.16. In the latest results, the free cash flow is still below $0.16.
Source: Starhub SGX announcements
With the entrant of new competitors, Starhub is forced to lower prices on their mobile and Pay TV. The Enterprise Fixed segment must grow faster than all the segments to offset the decline.
With declining profits, the cash flow would drop as well. But capex costs may stand still, hence the future free cash flow will drop and it may not support the dividend anymore.
While it is unfair to use 9M results to look the entire financial year, here is what the cash flow statements are telling us:
Source: Starhub SGX announcements
The problem still persists, Starhub’s operations are unable to fund its dividend payments to shareholders.
Forward Dividend Yield?
Dividend per share/share price = dividend yield.
Right now, Starhub trading at S1.76 and paying $0.16 per share.
Hence, $0.16 / $1.76 = 9% yield.
Since we know that the dividend yield is not sustainable, perhaps, Starhub may cut its dividend to $0.12 per share. It is just a wild assumption.
New yield is $0.12 / $1.76 = 6.8%.
Conclusion
Most investors would be happy with 6.8%. But when Starhub cut its dividend from $0.20 to $0.16, the share price reacted adversely. It fell more than 20%.
You may buy Starhub now and be fine with an expected yield of 6.8%. But there might be a potential where you suffer from its share price falling due to future cuts. Generally, for dividend paying stock, it is much better to buy a growing company.
Do take note!
(Disclaimer: I am not a shareholder of Starhub and I am not short Starhub.)