3 Things You Must Know About the Dividends of StarHub Ltd.

Telecommunications operator StarHub Ltd. (SGX: CC3) would likely be a familiar face for investors seeking a tasty dividend yield in Singapore. At its current price of S$4.15 and with a dividend of S$0.20 per share in 2013, the blue chip telco has a trailing yield of some 4.8%.

This compares very favourably against the market average. The SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s share market barometer the Straits Times Index (SGX: ^STI), carries a yield of around 2.6% only.

But this does not mean that Starhub would make a good income share. After all, picking a share based on its high yield alone is no magic elixir for a solid income-generating investment portfolio. Instead, here are three things which can help an investor make a better-informed investing decision.

1. Dividend history

Year Dividend per share (Singapore cents)
2005 9.00
2006 11.5
2007 16.0
2008 18.0
2009 19.0
2010 20.0
2011 20.0
2012 20.0
2013 20.0

Source: S&P Capital IQ

A quick glance at a share’s dividend history can give investors a good gauge on management’s commitment to share the spoils with investors. In Starhub’s case, the telco has not missed paying a dividend since initiating one in 2005. It’s also good to note that the company has managed to either grow or maintain its dividend in each year since, though its pay-out seems to have plateaued at S$0.20 per share starting from 2010.

Starhub has communicated its intention to pay out an annual dividend of S$0.20 per share for the whole of 2014 as well, so that would make five years in a row of stagnant dividends if that comes to pass. Investors looking for growing income might not be too enamoured with Starhub as a result.

2. Ability to generate free cash flow

Year Dividend per share (Singapore cents) Free cash flow per share (Singapore cents)
2005 9.00 12.1
2006 11.5 16.3
2007 16.0 27.4
2008 18.0 22.2
2009 19.0 26.9
2010 20.0 23.2
2011 20.0 26.2
2012 20.0 24.3
2013 20.0 17.0
Sum 154 203

Source: S&P Capital IQ

A company’s ability to generate free cash flow in excess of its dividend has some room for error in protecting its pay-outs when times are tough. From the table above, it can be seen that over the past eight years, Starhub has been able to produce free cash flow that’s more than adequate to cover its dividend payment.

3. Balance sheet strength

Year Net cash (S$, millions)*
2005 -64
2006 -578
2007 -825
2008 -793
2009 -666
2010 -572
2011 -486
2012 -380
2013 -421

*Net cash = Total cash minus total borrowings

Source: S&P Capital IQ

In a general sense, a company which is heavily indebted runs higher risks of having its dividends being negatively affected in the future. That’s because creditors can exert some form of control over the company’s use of cash through debt covenants. In addition, interest payments can put a strain on a company’s cash flows as well, preventing the distribution of more dividends. The latter issue is especially pertinent now with much of the world being in a low interest rate environment as there’s a possibility that interest rates can march higher in the future, making debt more expensive for companies.

With Starhub, the telco has certainly not shied away from borrowings – it has carried more debt than cash over the past eight years. That said, telcos do have stable businesses which can generate reliable and somewhat predictable cash flows. Such a characteristic could give Starhub the ability to take on more leverage without jeopardising its own financial health.

Foolish Bottom Line

Starhub has managed to tick two of the three boxes: It has had a solid history of paying dividends and has been able to generate more-than-adequate amounts of free cash flow to fund those pay-outs. The unchecked box Starhub has relates to its balance sheet where it has been perennially in debt, though like I mentioned earlier, it probably has a good reason to do so.

But even with a score of 2 out of 3, this still isn’t conclusive proof that Starhub would make a good income share. More work has to go into a qualitative examination of its business characteristics before a definitive answer can be reached.

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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.