Can Singapore Post Limited Support Its New Dividends?

When Singapore Post Limited (SGX: S08) released its results for the second quarter of its financial year ending 31 March 2017 (FY16/17) last month, it revealed a 33% reduction in its interim dividend.

The decision to cut the dividend was not unexpected.

In Singapore Post’s Annual General Meeting (AGM) in mid-July this year, the company’s chairman Simon Israel said that the firm was reviewing its dividend policy. This was a hint on what was to come.

The company’s new dividend policy was revealed in its aforementioned earnings release: Singapore Post’s dividend will now be based on a pay-out ratio ranging between 60% and 80% of the company’s underlying net profit for each financial year. The previous policy was based on an absolute amount.

Since the decision to enact a new dividend policy – which has resulted in a lower dividend – has been taken, the next question becomes whether the current dividend can be supported.

Cash flow, cash flow, cash flow

Ideally, Singapore Post’s dividends should be supported by its free cash flow. This is the amount of cash flow that is left after capital expenditures are deducted from operating cash flow. If a company’s free cash flow consistently exceeds its dividend payout, then investors have a measure of confidence that its dividend can be supported.

With this in mind, the chart below is a summary of Singapore Post’s free cash flow versus its dividend payout over its last few financial years:

Singapore Post FCF Dividends
Source: Singapore Post’s earnings reports and annual reports (numbers in thousands)

We can see that Singapore Post’s free cash flow fell into negative territory in FY15/16. In the first half of FY16/17, Singapore Post also generated $11 million in negative free cash flow.

So, what happened to Singapore Post’s free cash flow?

How now brown cow

For a deeper context, Singapore Post generated around $100 million in operating cash flow and spent $111 million in capital expenditure for the first half of FY16/17. As such, we can see that a big reason for the negative free cash flow is the amount of capital expenditure that Singapore Post is taking on.

In Singapore Post’s FY16/17 second quarter earnings briefing, the group’s covering chief executive and group chief financial officer, Mervyn Lim, gave his take on the free cash flow situation:

“So, you would see that in terms of the message I have shared with all of you – it’s consistent, has not changed, and that is our committed capex is going to come down and our free cash flow is going to significantly improve.”

Investments like the redevelopment of the company’s SPC Mall will cost money. Lim added that Singapore Post has an outstanding capital commitment of $177 million where around $170 million comes from the SPC Mall redevelopment. The remaining $7 million is for an eLogistics hub. Lim added:

“So that would be the last particular project which is SPC mall before we then see that cash flow from investments coming down to a minimum.

Of course as I have guided you all the time, we would need to have at least a running capex of about $56M to $60M to keep our network up going and in current position.”

To translate what Lim has said, Singapore Post’s free cash flow is likely to be negative for the time being until projects such as the SPC Mall redevelopment are completed. It might be better for investors to judge Singapore Post’s free cash flow position again once the SPC Mall is up and running.

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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.