Singapore Telecommunications Limited (SGX: Z74) hosted its fiscal fourth-quarter earnings presentation recently. During the presentation, the company had shared the quick summary below on its dividend: Source: Singtel’s earnings presentation From the above, we can see that Singtel has kept its dividend payout below 91% of its free cash flow between FY2012 (fiscal year ended 31 March 2012) and FY2015. But in FY2016, Singtel’s dividends actually took up 117% of its free cash flow. Singtel was asked to explain this occurrence in the presentation. Hey, what’s going on? Lim Cheng Cheng, the group’s chief financial officer replied: “With regards to the dividend,…
During the presentation, the company had shared the quick summary below on its dividend:
Source: Singtel’s earnings presentation
From the above, we can see that Singtel has kept its dividend payout below 91% of its free cash flow between FY2012 (fiscal year ended 31 March 2012) and FY2015. But in FY2016, Singtel’s dividends actually took up 117% of its free cash flow.
Singtel was asked to explain this occurrence in the presentation.
Hey, what’s going on?
Lim Cheng Cheng, the group’s chief financial officer replied:
“With regards to the dividend, why is it above the free cash flow, if you look at our guidance, which is based on 60% or 75% of the underlying net profit. We’ve always guided that we want to ensure a very steady and sustainable dividend payments.
There has been lumpiness of payments in our business; as you’ll be aware, free cash flow is also a function affected by the multi-year investments we have in our CapEx in our business. So that’s why you will see some lumpiness, experience some lumpiness in the free cash flow but overall this is what we are guiding to.”
The graph below summarises Singtel’s operating cash flow and the capital expenditures over its past seven fiscal years:
Source: Singtel’s earnings announcements
Free cash flow can be represented by the gap between operating cash flow (blue line) and capital expenditure (red line). As you can see, Singtel’s operating cash flow experienced a noticeable dip in FY2016. The dip here was due to movements in its working capital.
If Singtel is not able to generate enough free cash flow, it will have to fund its dividend through cash on its balance sheet or borrowings. This might not be something investors want. With that in mind, investors may want to observe if this lumpiness in Singtel’s cash flow picture works itself out in the next few quarters.
Next up, Singtel was also asked about the level of debt that it will maintain. Lim answered:
“As you can see from our balance sheet, it remains to be one of the strongest, and we have also said that we’ll maintain investment credit rating for the Company. If you also look at our net debt to EBITDA, we’re still very strong at about 1.17.
So obviously we don’t guide on the stage of funds on balance sheet over the next three to five years, but you can see that we have always been consistent, (1) investing into our core business and (2) you also read that we have subscribed for the rights in BTL [Bharti Telecom Limited], upstaking our associates, the terms and the timing must be correct and lastly we must have a good feeling that these are opportunities that augments our business and make sense.
We actually do M&A [mergers and acquisitions] like the Trustwave deal that we did.”
Singtel’s debt has been increasing over the past seven years while its cash position has slowly drifted downwards. You can see this in the following graph:
Source: Singtel’s earnings announcements
As of 31 March 2016, the telecommunications outfit had S$462 million in cash and equivalents and S$9.9 billion in debt. Over the past year, the acquisition of Trustwave for US$770 million had contributed to the increase in debt from FY2015 to FY2016.
In all, this is another area for Singtel’s investors to watch for improvements in the future.
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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.