Can M1 Ltd Sustain Its Current Dividend?

Singapore’s smallest telecommunications outfit M1 Ltd (SGX: B2F) has a large yield of 6% at its current price of S$2.53 thanks to its annual dividend of S$0.153 per share in 2015.

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 3.7% at the moment.

Given M1’s high yield, it could make the company an attractive stock for income investors seeking fat dividends. But, it can be dangerous to invest in a company based on its high-yield alone. That’s because the yield figure tells us nothing about what’s important here: What’s going to happen to that dividend in the future.

It’s for these reasons that I thought it’d be a good idea to take a look at M1’s business fundamentals and gauge its ability to sustain or grow its dividend in the future.

A look at M1’s dividend track-record over its last fiscal five years (2011 to 2015) show that the telco has been consistently dishing out the dough and those payouts have also climbed in general. These are traits to like and you can see it in the chart below:

M1's ordinary dividend from 2010 to 2015
Source: S&P Global Market Intelligence; author’s calculations (click chart for larger image)

But, there are some weak areas with M1 when it comes to its cash flows and balance sheet.

Dividends are ultimately paid by a company with cash and that cash can come from a few sources. A company can 1) take on more borrowings, 2) issue new shares, 3) sell assets, and 4) generate cash from its daily business operations.

In general, the fourth option is the most sustainable one for a company. And to keep an eye on that, we can look at a firm’s free cash flow. Free cash flow is the actual cash flow from a company’s business operations that’s left after the firm has spent the capital needed to maintain its businesses at their current state. The higher a company’s free cash flow can be over time, the larger the potential for fatter dividends in the future.

The chart below illustrates M1’s dividends per share, cash flow from operations per share, and free cash flow per share. What we can see is that M1’s cash flow from operations and free cash flow per share have declined markedly since 2011 (it’s especially so for the latter). In addition, M1’s dividend in 2015 was 35% higher than its free cash flow, meaning to say that the telco’s free cash flow can’t provide adequate cover for its dividend at the moment.

M1's ordinary dividend, cash flow from operations, and free cash flow per share from 2010 to 2015
Source: S&P Global Market Intelligence; author’s calculations (click chart for larger image)

Coming to the balance sheet, it’s worth noting that dividends don’t come with guarantees. When a company’s balance sheet is weakened as a result of heavy borrowings, its dividend is at risk of being reduced or removed entirely – due to pressure from creditors or a simple lack of cash – in the event of a downturn in its business environment.

A glaring recent example would be the London-listed mining giant, Glencore PLC. In September 2015, the company took several drastic steps – including eliminating its dividends – in order to protect its debt-laden balance sheet from any possible further erosion as a result of declining commodity prices.

There are signs that M1’s balance sheet has weakened: Its net-debt position (total borrowings minus cash) at end-2015 is at its highest since 2011. This is shown in the following chart:

M1's debt (total debt minus cash) from 2010 to 2015
Source: S&P Global Market Intelligence; author’s calculations (click chart for larger image)

Summing it all up, while M1 has a nice history of consistently paying a dividend, the telco’s free cash flow has been declining over the past few years and currently can’t cover its dividend. In addition, M1 is in a net-debt position with a deteriorating balance sheet.

These are not exactly signs of health that are found in solid income shares. But, do note that all you’ve seen with M1 here shouldn’t be taken as a guarantee that the telco’s dividend will surely be in trouble in the years ahead. A deeper study is required before any investing decision 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.