With Starhub Ltd’s High Yield Of 5.3%, Will It Make For A Good Dividend Stock?

Telecommunications services provider Starhub Ltd (SGX: CC3) is one blue chip share that has a tasty dividend yield at the moment.

Starhub, which is labelled a blue chip because of its status as one of the 30 constituents of Singapore’s market barometer the Straits Times Index (SGX: ^STI), has a yield of 5.3% at its present price of S$3.76 thanks to its annual dividend of S$0.20 per share in 2014.

In contrast, the SPDR STI ETF (SGX: ES3) – an exchange traded fund which tracks the fundamentals of the Straits Times Index – has a yield of just 2.9% currently.

But, it can be a mistake to invest in a share just because it has a high yield. Instead, it’s more important to consider Starhub’s ability to maintain or grow its dividends in the future.

The anatomy of a strong yield

Generally speaking, there are a few things I like to dig into when I’m trying to assess a company’s ability to sustain or raise its payouts in 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.

Starhub’s dividend: Yay or Nay?

The following are two charts which show how Starhub stacks up against the three criteria for the period stretching from 2005 to 2014:

Starhub's total dividends (ordinary plus special) and free cash flow (FCF) per share

Starhub's balance sheet figures

Source: S&P Capital IQ

Let’s start with the commendable aspects first.

Over the time frame we’re looking at, Starhub has had a great track record in terms of paying a dividend; it has distributed a payout in each year since 2005 and those payouts have climbed slowly over time.

Meanwhile, the firm’s also excelled at generating free cash flow, with the important financial metric coming in higher than its dividends for the most part.

With that, let’s switch gears to touch on the areas of concern.

The first chart has so far painted a healthy picture for us with Starhub. But, it also shows how the telco’s free cash flow has started to fall steadily over the past few years, with 2013 and 2014’s free cash flow being lower than the dividends paid. This trend is something investors have to watch – if it continues in the future for a prolonged period of time, Starhub may just struggle with its dividends.

Elsewhere, the second chart shows how Starhub’s balance sheet is not the strongest, with the level of debt coming in higher than the amount of cash.

With the different areas of concern (the recent dip in free cash flow and the weak balance sheet), it’d appear that Starhub may not have much room for error when it comes to raising or maintaining its dividends in the future.

A Fool’s take

Given what we’ve seen with Starhub, despite its blue chip status, investors may still want to note the risks involved with its dividend.

These being said, its’ worth pointing out that this look at the telco’s historical financials is not a holistic overview of the entire situation. Investors would still need to dig deeper into the qualitative aspects of the company’s business and consider its ability to grow in the future.

A study of Starhub’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.

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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.