Would Peter Lynch Buy Singapore Telecommunications Limited

Peter Lynch likes smaller companies that have the potential to grow into much bigger things. That should, in theory, rule out Singapore Telecommunications (SGX: Z74), which is worth a monumental S$64b.

But in comparison to the giants of the telecom industry elsewhere in the world, SingTel is relatively small, so it should have the potential to grow. It is smaller than China Mobile, which is worth S$372b. It is smaller than AT&T, which is worth S$240b.It is also smaller than Deutsche Telecom, which is worth S$104b.

One of the main things that Lynch looks for is a company that is cheap compared to its earnings growth. Currently, SingTel is valued at 17 times profits. That is quite expensive.

But it is even more expensive when compared to the rate at which profit have grown. Over the last five years, bottom-line profits have barely budged at SingTel. Over the last decade, profits have grown at a compound rate of just 2% a year.

In its favour, SingTel is not heavily leveraged. But it does have Net Debt rather than Net Cash, which is unlikely to impress Peter Lynch. On the other hand, SingTel pays a decent dividend, which could just sway Lynch. Its dividend yield of 4.2% is above the market average.

However, SingTel pays out quite a large proportion – some 70% – of its profits to shareholders. The low retention ratio of 30% coupled with its Return on Equity of 15.6% could imply a mundane growth rate of around 5%.

On balance, Peter Lynch is unlikely to whip out his chequebook for SingTel. Income investors might but not a growth investor such as Lynch.

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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 Director David Kuo doesn’t own shares in any companies mentioned.