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Would Dividends at Starhub Ltd Continue to Grow?

Singapore’s second largest telecommunications operator Starhub (SGX: CC3) has more than doubled its dividend since its public listing in Sep 2004. The company first started paying a dividend of S$0.09 per share in 2005, which has since grown by 122% to S$0.20 in 2012.

The growth in dividends have also played a huge role in the share’s total return (share price increases plus gains from reinvested dividends) of 504% since the start of 2005, which has roundly trounced the Straits Times Index’s (SGX: ^STI) 47% gain in the same period of time.

The table below shows how Starhub’s dividend has evolved over the years:

Year

Dividend per share

2005

S$0.090

2006

S$0.115

2007

S$0.160

2008

S$0.180

2009

S$0.190

2010

S$0.200

2011

S$0.200

2012

S$0.200

Source: S&P Capital IQ

As we can see, despite its dividend growing rapidly in its first few years as a publicly-listed company, Starhub’s dividend has remained flat at S$0.20 per share since 2010. With the company releasing its full year results soon on 6 Feb 2014, can investors expect the company to resume any growth in its dividend?

The answer’s pretty self-explanatory as Starhub mentioned in its third quarter earnings release that it “intend[s] to maintain [its] annual cash dividend pay-out of 20 cents per ordinary share for 2013.” This would mean that investors would expect an annual pay-out in 2013 that’s at the same level as that for 2012.

But, that doesn’t mean that investors should be lax with the company and expect those dividends to be a given.

In Starhub’s 2012 annual report, its chief financial officer, Kwek Buck Chye, commented on the sustainability of the company’s dividend:

Starhub is generating a healthy and sustainable free cash flow. In setting our dividend policy, the Board took a projected three-year view of the Company’s earnings performance, the Company’s reserves and cash flows, to ensure that there is adequate funding to meet our dividend payments requirements….”

Kwek’s comments above suggest that Starhub’s keeping a close watch on its cash flows with regard to setting its dividend and it is something investors might want to note.

This is how the company’s free cash flow and dividends compare against each other:

Year

Free Cash Flow

Dividend Paid

Difference

2006

S$334m

S$217m

S$117m

2007

S$483m

S$266m

S$217m

2008

S$378m

S$308m

S$70m

2009

S$461m

S$317m

S$144m

2010

S$398m

S$343m

S$54m

2011

S$450m

S$343m

S$106m

2012

S$417m

S$343m

S$73m

9 months ended Sep 2013

S$278m

S$258m

S$20m

Source: S&P Capital IQ

We can see that the company has been able to generate more cash than needed to pay off its dividend over the years. If Starhub’s competitive position in the local telecommunications market remains in status quo with respect to its local rivals SingTel (SGX: Z74) and M1 Limited (SGX: B2F), the company would likely not have a problem in generating sufficient cash to meet its pay-out.

But while the company’s cash flows currently look healthy and management has stated its intention of maintaining its dividend when it reports its full-year results over the next few days, investors should also be alert as to whether the company’s overstretching itself to meet those dividends.

For that, we could take a look at its balance sheet. This is how Starhub’s net debt (total debt minus total cash) has evolved over the years and is a proxy for the amount of financial risks the company’s willing to take on.

Year

Net debt (Total debt minus cash)

2006

S$583m

2007

S$830m

2008

S$785m

2009

S$662m

2010

S$568m

2011

S$483m

2012

S$376m

9 months ended Sep 2013

S$356m

Source: S&P Capital IQ

Starhub’s net debt position has steadily declined over the years suggest that it’s not just simply taking on debt to pay out dividends to shareholders. But, if investors ever find the company’s net debt position increasing for prolonged periods of time without any commensurate growth in sales, earnings and cash flow, that could be a signal of Starhub overreaching in trying to pay its dividends.

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