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Tug-of-Fools: StarHub – The Bull Argument

250px-Bulle_und_Bär_FrankfurtKaching! That is a sound that StarHub’s (SGX: CC3) shareholders should be familiar with. After all, the telecom operator has made quarterly dividend payments its hallmark since the second quarter of 2005, providing investors with steady, regular income.

At its current share price of $4.05, and with management projecting a total of $0.20 in dividends for this year, the company’s forward dividend yield is 4.9%. That’s an attractive return, given that it’s almost twice the 2.5% yield that investors are getting in the broader market through the Straits Times Index (SGX: ^STI) tracker, the SPDR STI ETF (SGX: ES3).

Of course, an attractive dividend yield is only appealing if a company is able to keep handing out those cheques using cash that is generated from its businesses.

And on that count, StarHub is a cash-hub.

You need cash for dividends and StarHub makes plenty of dough

It’s been said that a picture is worth a thousand words. So, I’ll save you the trouble of poring through tables of numbers and let you check out the graph below instead.

StarHubCashFlow

That’s about as steady a free cash flow stream as you can get and signs are that StarHub’s future cash flow performance could be similar to its past.

A huge portion of StarHub’s revenue comes from subscription-based services – around 89% of 2012’s revenues, to be exact. Subscribers aren’t likely to change telecom providers if service standards do not deteriorate significantly, and that is within StarHub’s control.

So far, the company has not disappointed, as evidenced by the low quarterly customer churn rates of between 0.9% to 1.6% for 2012 and the first quarter of 2013, depending on the quarter and the service.

Low customer churn brings with it higher predictability for revenues and by extension, cash flows. This is advantageous for investors with a focus on steady, reliable income.

Neutralising the debt gremlin

At first glance, StarHub’s balance sheet is bloated with debt, as it is currently carrying S$688m in loans with only S$137m worth of shareholder’s equity.

Investing 101 states that high debt levels can create risks for shareholders. But for StarHub, it helps generate better shareholder returns – a phenomenal 293% return on equity, to be exact. Shareholders are in a win-win situation here by getting regular income as well as seeing undistributed cash ploughed back into the company to earn impressive returns.

Circling back to debt, out of the S$688m that StarHub owes to other parties, S$220m is not due for repayment for another nine years – September 2022. So that’s a long-time away before there are any worries. Not much is known of the remaining S$468m, so there could indeed be risks there. But, the company’s excellent cash flows should help to neutralise some of that risk.

StarHub’s moving up?

With reliable cash flows and smart use of debt to generate superior returns on shareholders’ equity, it’s possible for StarHub’s dividends to resemble salaried workers’ monthly pay-checks, i.e. very good news for income investors. And that’s the reason why the bull can charge through the bear’s den.

That concludes the bull argument. You can read the bear argument here.

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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 Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.