Starhub Ltd is Offering a 5.1% Dividend Yield – Is it a Bargain?

Based on its closing price of $3.95 yesterday, info-communications firm Starhub Ltd (SGX: CC3) is offering investors a 5.1% trailing dividend yield.

With the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking Singapore’s market barometer the Straits Times Index (SGX: ^STI) – having a yield of just 2.8% currently, it would appear that Starhub’s shares may represent good value.

But before we put our hard-earned money to work, let’s dig in to Starhub’s business to see if it really represents a bargain at these prices. Here’re three quick observations about the company.

Repeatability of its business

Although it may be possible to change your mobile service provider without too much fuss, the churn data (rate of customers leaving) coming from Starhub suggests otherwise.

In the past five quarters, Starhub has maintained a churn rate of below 1% for four quarters. This points to how the revenue from its mobile services segment has a strong recurring nature to it.

2015-07-01 Starhub Slide

Source: Starhub earnings presentation

The recurring nature (or repeatability) of Starhub’s business  would be important for two reasons. First, the mobile services segment makes up a significant portion of the company’s revenue. Second, Starhub maintains a net debt position on its balance sheet (more on this soon) and the repeatability of its business helps reduce some of the financial risks associated with the taking on of debt.

Revenue Business Segment Starhub

Source: Starhub’s earnings report

Free cash flow versus dividends

Starhub has had a steady track record with paying a dividend. Over the past five years from 2010 to 2014 (Starhub’s fiscal year coincides with the calendar year), Starhub has kept its annual dividend unchanged at S$0.20 per share.

Year Starhub’s dividends per share
2010 S$0.20
2011 S$0.20
2012 S$0.20
2013 S$0.20
2014 S$0.20

Source: Starhub’s website

Ideally, we would want Starhub’s dividends to be funded by its business operations alone. To see if that’s the case with the company, we can compare its free cash flow (operating cash flow minus capital expenditures) with the amount of dividends it has been paying.

FCF Dividends Starhub

Source: Starhub’s earnings report; author’s calculations

As you can see, Starhub has traditionally paid out most of its free cash flow to shareholders in the form of dividends. Worryingly, the telco’s free cash flow in the past two years has fallen behind the amount it needs to fund its dividends.

Furthermore, Starhub reported negative free cash flow in its recent quarterly earnings results. This represents a risk to consider when looking at Starhub’s dividend.

Balance sheet strength

As mentioned earlier, Starhub maintains a net debt position and it’s been the case for a good number of years. This is displayed in the graph below (notice how the borrowings are higher than the cash on hand).

image (4)

Source: Starhub’s earnings report

As of 31 March 2015, Starhub had S$224.1 million in cash and equivalents and S$687.5 million in borrowings.

While Starhub’s cash on hand may be able to help it tide over small gaps between its free cash flow and dividend payouts,  we may still want to see the dividends being funded by cashflow over the long term.

Foolish take away

As a Foolish investor, we may want to look beyond Starhub’s attractive dividend yield (5.1%) and dig in further to determine the long-term viability of its dividend.

If the dividends of Starhub is where you expect to derive most of the value from your investment in the share over the long-term, then looking at it from a business perspective like what we’ve done here may be where you want to start.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.