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StarHub Ltd Has A Juicy 7% Dividend Yield. Can its Dividends Be Sustained?

StarHub Ltd ’s (SGX: CC3) stock opened trading at $2.79 on Monday. At that price, the telco is offering a 7% trailing dividend yield.

The key word here is “trailing” or the dividends that StarHub has paid out over the last twelve months. Investors might have their eye on whether future dividends look the same as the last twelve months. Or is there a risk that dividends will be cut?

Let’s take a look.

Show me the money

For me, a source of sustainable dividends is sustainable free cash flow. Simply put, free cash flow is the amount of cash left over after deducting capital expenses from its operating cash flow.

Below is the historical free cash flow for StarHub over from 2010 to 2015.

StarHub's dividend, cash flow from operations, and free cash flow per share from 2010 to 2015

Source: S&P Global Market Intelligence

As we can see, StarHub’s free cash flow per share has fallen below its dividend per share payout. The discrepancy has not escaped the eyes of analysts in a recent StarHub earnings briefing. A question was posed on whether dividends will be reduced to keep it inline with its free cash flow and earnings.

Dennis Chia, StarHub’s chief financial officer responded:

“So in question, in dividends, we guide to dividends for the current year, and we have guided that we will maintain S$0.20 dividend for the current year.”

“We have also always guided the market that we will pay dividends on a sustainable basis based on cash flows that we can generate on a sustainable trend, and so this is something that we will continue to look to guide dividend payments in the subsequent years.”

For the first nine months of 2016, StarHub generated S$229.4 million in free cash flow. This is a 33% increase from the S$196.1 million generated over the same period last year. Chia had also mentioned earlier that this quarter’s free cash flow of S$2 million includes payments made for the spectrum payment:

“As a result of the relatively higher cash CapEx payments for the quarter, we generated S$2 million of cash flow. Excluding the spectrum payment, this would have been S$82 million or S$0.047 per share.”

For comparison, StarHub paid out around S$346 million in dividends last year. At the moment, StarHub still has some ground to make up in terms of free cash flow. To be sure, the telco has one more quarter worth of free cash flow before we can see the 2016’s free cash flow picture.

That could be the one figure that income investors are eyeing.

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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.