Currently, Singtel’s dividend yield is 4.8%, which is significantly higher than the market’s yield of 3.2%. But, even so, Singtel’s yield pales in comparison to StarHub and M1 – the latter two are offering dividend yields of more than 7% each at the moment.
Given the ultra-low interest rate environment Singapore is in, a 7% dividend yield coming from some of the largest companies here sounds like a great deal on the surface. But it’s important to ask: Are StarHub and M1’s dividends sustainable?
The market is discounting both telcos. And a big possible reason is the entry of a fourth telco in Singapore, TPG Telecom. Earlier this month, the Australia-based TPG Telecom won the bid to become the newest player in Singapore’s telco industry.
TPG Telecom’s presence is likely to have heavier effects on Starhub and M1 when compared to Singtel. That’s because the former two source their revenue predominantly from Singapore whereas Singtel has significant business interests in Australia and many other parts of Asia.
Investors’ fears with StarHub and M1 may well be justified. In the third quarter of 2016, StarHub and M1 saw their profits decline by 21% and 16%, respectively.
A more worrying sign is their cash flow situation. Both companies experienced a decline in free cash flow in the latest quarter whereas their dividends were not reduced. If both companies’ cash flows continue to be under pressure, there’s a chance their dividends would be negatively affected as well.
Of course, StarHub and M1 do have ways to maintain their dividends. For instance, they could take on more debt to pay a dividend. As both of them have healthy interest coverage ratios at the moment, they could easily take on more debt.
But, the fundamental issues plaguing both companies require more than just more debt to solve. Their businesses are located predominately in Singapore, as mentioned earlier. Moreover, their businesses are also centered on the highly competitive telecommunications industry. How StarHub and M1 can find growth in the future will be the key when it comes to them sustaining their dividend.
With the entrance of a fourth telco in Singapore, will the profit margins and returns on equity (ROE) for the telco industry be reduced going forward? For now, the high dividend yields of over 7% that come with StarHub and M1’s stock makes them worthy of a deeper investigation by investors.
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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 Stanley Lim does not own any companies mentioned above.