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3 Things You Must Know About the Dividends of Singapore Telecommunications Limited

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Local telecommunications operator Singapore Telecommunications Limited (SGX: Z74) is well-known as being Singapore’s largest telecommunications operator. Its shares are also known for having a juicy yield that’s higher than the market average.

Based on its current share price of S$3.91 and its dividend of S$0.168 per share for the financial year ended 31 March 2014 (FY2014), SingTel carries a historical yield of 4.3%. By way of comparison, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund that tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI) – carries a distribution yield of around 2.6%.

In light of that, SingTel’s yield does seem attractive. But, is the telco’s higher-than-average yield actually safe? Here are three things investors must know that can help answer the question.

1. Dividend history

Financial year ended 31 March Dividend per share (Singapore cents)
2004 6.40
2005 13.0
2006 10.0
2007 20.5
2008 12.5
2009 12.5
2010 14.2
2011 25.8
2012 15.8
2013 16.8
2014 16.8

Source: S&P Capital IQ

SingTel has been paying consistent dividends over the past decade so that’s a good sign of management’s intent in rewarding shareholders. In addition, though growth in those pay-outs hasn’t been as predictable as clockwork, there’s still a clear upward trend in the telco’s dividend.

2. Ability to generate free cash flow

Financial year ended 31 March Dividend per share
(Singapore cents)
Free cash flow per share (Singapore cents)
2004 6.40 18.5
2005 13.0 17.8
2006 10.0 16.6
2007 20.5 17.2
2008 12.5 22.0
2009 12.5 20.1
2010 14.2 21.2
2011 25.8 25.2
2012 15.8 21.7
2013 16.8 23.6
2014 16.8 20.4

Source: S&P Capital IQ

A company that is able to generate free cash flow in excess of its dividends paid is in a good position to maintain or even grow its pay-outs even when business is tough – and that’s a good thing for income investors.

Based on the table immediately above, SingTel’s a company that has been shown to have by-and-large ticked the right box.

3. Balance sheet strength

Financial year ended 31 March Net cash (S$, billion)*
2004 -6.21
2005 -5.18
2006 -3.77
2007 -4.74
2008 -6.16
2009 -6.39
2010 -5.23
2011 -4.41
2012 -7.23
2013 -6.77
2014 -7.20

*Net cash = Total cash minus total borrowings

Source: S&P Capital IQ

A high level of debt could inhibit a company’s ability to pay dividends in the future. This could be due to limitations being placed on the company by its lenders or from a company being forced to channel its cash flows toward servicing its borrowings (remember, a company’s obliged to pay-out interest on its borrowings and refinance its debt; it’s not the case with  dividends).

On this front, Singapore’s largest telco is disappointing as its borrowings have been much higher than its cash holdings for more than a decade at least. But, to be fair, telcos have businesses that generates predictable and steady streams of cash flows and that makes it less risky for them to take on higher leverage.

Foolish Bottom Line

SingTel has done well in the past in terms of paying out consistent dividends and generating adequate free cash flow. But, it could be considered somewhat over-leveraged in the eyes of more conservative investors who prefer stronger balance sheets.

So, is its yield safe? Though a study of its financial history is useful, it still can’t give investors the complete picture with the company. Consideration must still be given to issues such as how the telco industry might evolve in the future and how SingTel’s positioned in each of its geographical markets (the company has a truly global reach). Only when that’s done can a more definite answer to the above question be given.

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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.