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Important Insights About M1 Ltd’s Dividends That Investors Should Know

Telecommunications outfit M1 Ltd (SGX: B2F) may not be an exceptionally large company in Singapore (it has a market capitalisation of ‘only’ S$2.73 billion), but it has a dividend yield that packs a solid punch.

At its current share price of S$2.91, M1 has a tantalising yield of 6.5% thanks to its annual dividend of S$0.189 per share in 2014. In comparison, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has a yield of just 3.2% at the moment.

M1’s high yield may make it a popular dividend stock for investors. Here’re two charts which could give us more insight into the telco’s payouts.

The first chart illustrates M1’s annual ordinary dividends over the past decade from 2004 to 2014:

Chart 1 - M1's ordinary dividends per share

Source: S&P Capital IQ

As you can tell, M1 has managed to consistently pay a dividend over the long timeframe we’re looking at it. What’s more, those payouts have also steadily marched higher over time. Such traits can give investors some confidence in M1’s ability to continue dishing out the dough in the years ahead – that’s a key takeaway we have from Chart 1.

But, the amount of dividend may be a little suspect, as we shall see in Chart 2 below, which plots M1’s payout ratios:

Chart 2 - M1's payout ratios

Source: S&P Capital IQ

There are two types of payout ratios: One measures a company’s dividends as a percentage of its earnings (let’s call this the earnings payout ratio) while the other uses the free cash flow number in place of earnings (let’s call this the cash flow payout ratio).

Both payout ratios can be useful indicators for how much room for error it has in sustaining or growing its dividends in the years ahead. The lower the ratios, the larger the margin of safety.

While M1’s payout ratios had started out at relatively healthy levels in 2004 (73% for the earnings payout ratio and 44% for the cash flow payout ratio), the numbers have trended upward over the years.

At the end of 2014, M1’s dividends were at 100% and 132% of its earnings and free cash flow, respectively. In other words, the telco’s dividends now have a much slimmer cushion to absorb any negative impacts from adverse business developments.

In sum, while M1 has a decent track record with its dividends, there are risks to note when it comes to the telco’s ability to maintain or raise its future payouts.

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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.