Will M1 Ltd Make For A Good Dividend Stock With Its High Yield Of 5.8%?

Singapore-based telecommunications services provider M1 Ltd (SGX: B2F) may be the smallest of the lot in its field – the company trails Starhub Ltd (SGX: CC3) and Singapore Telecommunications Ltd (SGX: Z74) in Singapore’s telco market – but its dividend yield is anything but tiny.

At its current price of S$3.28, M1 has a yield of 5.8% thanks to its annual dividend of S$0.189 per share in 2014. For context, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the fundamentals of Singapore’s market barometer the Straits Times Index (SGX: ^STI) – has a yield of just 2.8% at the moment.

With M1’s high yield, this raises the question: Is the company a good dividend stock to own? To answer that, we’d have to dig into the firm’s ability to sustain or grow its dividends in the future.

Foundations for a sustainable yield

Generally speaking, there are a few things about a company I’d dig into when I’m trying to assess the firm’s ability to maintain or raise its payouts over the years ahead:

  1. The company’s track record in growing and paying its dividend.

This criterion’s importance lies in the insight it can give investors about management’s commitment to reward shareholders as the business grows.

  1. The company’s ability to grow its free cash flow over time and generate it in excess of the dividends paid.

Ultimately, a company pays its dividends with the cash it has and that cash can come from a few sources. A company can 1) take on debt, 2) issue new shares, 3) sell its assets, and/or 4) generate cash from its daily business activities.

There are always exceptions, but it’s generally more sustainable for a company to pay its dividends using the cash it has generated from its businesses.

It thus follows that investors should be keeping a close watch on a company’s free cash flow as it is the actual cash flow from operations that’s left after the firm has spent the necessary capital needed to maintain its businesses at their current state. The higher the company’s free cash flow can be over time, the larger the potential for growing dividends.

  1. The strength of the company’s balance sheet.

When a company has a weak balance sheet that’s laden with debt, its dividends can be at risk of being reduced or removed – either due to pressure from creditors or from a simple lack of cash – even at the slightest hiccup in the fortunes of its business.

On the other hand, a strong balance sheet that is flush with cash gives a company the resources to protect its dividends during the inevitable tough times that rolls along every now and then. In addition, it enables the firm to go on the offensive during a downturn and reinvest for growth even as its financially weaker competitors have to batten down the hatches; this plants the seeds for potentially higher dividends in the future.

M1’s yield: Yay or nay?

The following two charts show how M1 has fared against the three criteria over the past decade ended 2014:

M1's ordinary dividends and free cash flow (FCF) per share

M1's balance sheet figures

Source: S&P Capital IQ

Let’s start with the praise-worthy aspects first. As the first chart shows, M1 has been consistently paying a dividend in each year since 2004 and those payouts have even displayed a slight upward bias; these are traits investors would like to see. In addition, the firm has also been adept at generating free cash flow.

But – and this is where the areas of concern appear – M1’s free cash flow hasn’t been able to grow over the past decade. In addition, M1’s track record of generating free cash flow at a level that’s higher than its dividends over the past few years (stretching back to 2009) is also patchy. If these situations continue, it’d be hard for M1 to raise or even maintain its payouts in the future in a sustainable manner.

In the meantime, we can also observe that M1’s balance sheet is also not the strongest around, with its debt level at end-2014 coming in way higher than the amount of cash on hand.

A Fool’s take

With the possible emergence of a fourth telco operator in Singapore in the near future, M1’s business may face some pricing pressure. When this is combined with what we’ve seen about M1 earlier, investors who are enticed by the company’s high yield need to be aware that the firm may not have that much room for error in trying to protect or grow its dividends.

That being said, it’s worth noting that this look at M1’s historical financials is not a holistic overview of the entire picture. A deeper dive into the qualitative aspects of the company’s business and a careful assessment of its ability to grow is also needed.

A study of M1’s financial track record can be important and informative, but more work needs to be done beyond this before any investing decision can be reached.

For more analyses on dividend investing and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

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.