Battle Of The Telcos: Singapore’s Best Telecommunications Dividend Stock

There are currently only three companies in Singapore providing mobile telecommunications services and all three are actually listed. They are, in order of size from the largest to the smallest, Singapore Telecommunications Limited (SGX: Z74), StarHub Ltd (SGX: CC3), and M1 Ltd (SGX: B2F).

When it comes to their merits as dividend stocks for income investors, would Singtel come out tops as well or would Starhub or M1 usurp the throne? To find out which of the trio of telcos would be the better dividend stock, there are a number of key things we can compare: dividend yields; dividend growth rates; balance sheet strength; and payout ratios.

Dividend yields

The dividend yield of a stock tells us how much bang for our buck we’re getting in dividends when we invest in it. Here’s a simple illustration: A stock with a yield of 5% will pay out S$50 in annual dividends if we invest S$1,000 in it. The logic follows from there that a higher yield will be of benefit to income investors.

Singtel, Starhub, M1, yield table

Source: S&P Capital IQ; author’s calculations

On the basis of yields, M1 is by far the leader. At its current price of S$2.78, the smallest telco of the lot has a yield of 6.8% thanks to its annual dividend of S$0.189 per share in 2014. StarHub follows next with its yield of 5.6% while SingTel rounds up the trio with a yield of ‘just’ 4.5%.

Dividend growth

A stock’s yield is an important figure, but there’s not much it can tell us regarding what the stock’s future dividend will look like. For that, we can study a company’s historical dividend growth. Although the past is not a perfect indicator for what lies ahead, it’s still useful for forming future expectations.

Growth in total dividends (ordinary + special) for Singtel, StarHub, and M1

Source: S&P Capital IQ; author’s calculations (the years in the chart refer to the calendar year for StarHub and M1; for Singtel, 2005 refers to the fiscal year ended 31 March 2006, 2006 to fiscal year ended 31 March 2007, and so on)

StarHub is the standout performer here. From 2005 to 2014, the company’s dividends have climbed by a total of 220% 120%. This compares with Singtel’s 75% growth in dividends and M1’s shrinking payouts.

Balance sheet strength

The telco industry can be considered to be stable in nature as its services are still needed even during economic downturns. This stability in turn allows telcos to assume high levels of debt to fund their businesses.

But even so, a telco with a weak balance sheet that’s bloated with too much debt would cause its dividends to run the risk of being reduced or removed – either due to pressure from creditors or a simple lack of cash – even at the slightest hiccup in the fortunes of its business.

In contrast, a strong balance sheet – one that has ample cash and relatively lesser borrowings – gives a company a better chance of protecting its dividends in the event of inevitable tough times in the business environment which can happen every now and then.

Having a solid balance sheet can even allow a firm to go on the offensive during downturns when its financially-shakier peers have to batten the hatches. This help plant the seed for potentially higher dividends in the future.

Singtel, Starhub, M1, net-debt equity ratio

Source: Companies’ earnings reports; author’s calculations

As you can tell from the table just above, Singtel has the strongest balance sheet among the trio by virtue of it having the lowest net-debt to equity ratio

Payout ratios

There are two important payout ratios here: One measures a stock’s dividend as a percentage of its earnings (we can call this the earnings payout ratio), while the other looks at a stock’s dividend as a percentage of its free cash flow (we can call this the cash flow payout ratio).

Both ratios can be useful indicators of the room for error that a stock has to maintain or grow its dividends in the future. There are no hard or fast rules as to what are considered ‘strong’ numbers, but the general rule of thumb is that the lower the ratios are, the more buffer there is for a company to absorb negative business developments.

Payout ratios for Singtel, StarHub, and M1 in 2014

Source: S&P Capital IQ; author’s calculations (2014 refers to the calendar year 2014 for both Starhub and M1; 2014 refers to the fiscal year ended 31 March 2015 for Singtel)

Singtel gets the nod here again with its lower payout ratios (of both the earnings and cash flow variety) as compared to the other two telcos.

 A Fool’s take

In a tally of the final scores, Singtel has emerged as the ultimate winner here with it taking top honours in two of the four categories.                                    

Notably, all that we’ve seen above shouldn’t be taken to be the final word on the investing merits of the three telco stocks. A deeper study regarding the qualitative aspects and future growth of their businesses will be required before any investing conclusion can be reached.

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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.