The Best Dividend Blue Chip Stock in Singapore Currently Is…

Drumrolls please!

The best yielding stock among the constituents of the Straits Times Index (SGX: ^STI), excluding the real estate investment trusts and business trusts, is currently StarHub Ltd. (SGX: CC3)!

There are no prizes for guessing as Starhub has been known to be a great dividend payer over the years. At its current price of S$4.14, it is yielding 4.8% and is going at close to 20 times its historical earnings.

The blue chip telecommunications outfit, which counts Singapore Telecommunications Limited (SGX: Z74) and M1 Ltd (SGX: B2F) as its main rivals, has been handing out 20 Singapore cents per share as dividends for the past four years from 2010 to 2013.  Before that, the firm had been consistently increasing its dividends every year from nine cents in 2005 to 19 cents in 2009.

Year Dividends 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

In the first three quarters of 2014, Starhub had already given out 15 Singapore cents per share in dividends for the year. In its third quarter press release, the company said that it “intend[s] to maintain our annual cash dividend payout of 20 cents per ordinary share for 2014”.

In the third quarter of 2014, Starhub’s quarterly revenue rose 2.3% year-on-year to S$592 million, mainly due to a 73.5% increase in handset sales which was offset by a 17.4% year-on-year decline in broadband revenue. Net profit for the telco went up 2.6% year-on-year to S$97.7 million.

The surge in handset sales is thanks to the launch of the new iPhone models like the iPhone 6 and iPhone 6 Plus. Starhub reckoned that the increase will continue into the final quarter of the year.

One thing to note is that even though Starhub can meet its dividend obligations going forward, it seems to me that it might be paying too much in dividends.

Starhub has around 1.7 billion shares outstanding. Therefore, about S$345 million worth of dividends are given out in total every year based on an annual payout of 20 cents per share. The free cash flow generated is sufficient to cover the dividends; for the past four financial years from 2010 to 2013, the company generated an average of S$390 million in free cash flow.

However, there doesn’t seem to be enough cash to pump back into its business. This may be the reason why Starhub has “remained in a net debt position throughout the last five financial years,” as noted by my Foolish colleague, Chin Hui Leong. Starhub may have taken on debt to fuel its business. Or in another sense, the cynics may say that the firm is taking on debt to pay its dividends.

But whatever it is, the market seems to be happy with what Starhub is doing. Over the past five years since the start of 2010, Starhub’s shares have gained some 93% in price alone whereas the Straits Times Index has put on only 16%.

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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 Sudhan P doesn’t own shares in any companies mentioned.