M1 Ltd is Offering a Near-8% Dividend Yield. Can it Be Sustained?

M1 Ltd ’s (SGX: B2F) stock closed trading at $1.96 on Wednesday. At that price, the telco is offering a near-8% trailing dividend yield.

The key word here is “trailing” or the dividends that M1 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 M1’s historical free cash flow per share and dividends between 2011 to 2015.

M1 earnings and free cash flow chart from annual report

M1 dividend from annual report

Source: M1’s annual report

M1 paid out 18.9 cents per share in dividends for 2014. The dividends exceeded the amount of free cash flow per share that M1 generated for 2014. In 2015, M1’s dividend was reduced to 15.3 cents a share. Despite the reduction, the dividends still exceeded M1’s free cash flow per share.  

Analysts posed a question on whether dividends will be cut in a recent M1 earnings briefing. Lee Kok Chew, M1’s chief commercial officer said:

“What we believe is that our dividend policy of paying out at least 80% of net profit after tax is sustainable. If you look at our operating cash flow, that remains strong and we will be able to sustain that level of dividend.”

For the first nine months this year, M1 generated S$185.5 million in free cash flow (excluding the purchase of spectrum rights). This is an increase from the S$116.2 million generated over the same period last year. Dividend payouts in the first nine months were S$142.3 million.

On the other hand, M1’s is looking to invest into a portfolio of digital solutions to combat the threat of OTT (over-the-top) services. In the previous quarter, Lee said :  

“Increasing adoption of OTT [over the top] services has impacted traditional telecoms revenue, but led to higher demand for data. We are investing in new technologies and capabilities and building up a portfolio of digital solutions to enhance our service proposition and cater to changing customer needs.”

The need for alternate sources of income could be urgent. M1’s net profit is down 12.6% in the first nine months of this year. We will have to check in next quarter to see how M1 closes in the year 2016.

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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.