M1 Slashes Its Dividend: Here’s What Management Said

Local telco M1 Ltd (SGX: B2F) released its 2016 fourth quarter earnings results last week and proposed a final dividend of 5.9 cents per share.

The dividend is a 29% cut compared to 2015’s final dividend of 8.3 cents per share. This is the second time in as many years that M1 has cut its final dividend. In 2014, the final dividend was 11.9 cents per share.

With its lower final dividend, M1’s total dividend for 2016 is 12.9 cents. This is a reduction of around 15.6% from 2015. The matter did not escape scrutiny from analysts during M1’s earnings briefing for its 2016 fourth quarter results; there were questions on the sustainability of the company’s current dividend and future expectations.

How now, brown cow?

M1 guided towards an 80% dividend payout for 2017. There were questions on whether this dividend guidance was sustainable, given the investments and spectrum auction purchase that will consume the telco’s resources in the year.

M1’s chief financial officer Nicholas Tan responded:

“In terms of dividends, we have always been prudent in our policies and risen them higher when we think we have sufficient cash. And we are consistent and we will continue to maintain our dividend policy to be at least 80% of our net profit after tax. So there is no change in that.”

It’s worth noting that M1’s net profit fell by 16% from $178.5 million in 2015 to $149.9 million in 2016. And as already mentioned, the total dividend in 2016 had declined by around 15.6%. Those two rates are pretty similar.

Is M1’s dividend sustainable?

M1’s management was also challenged on the sustainability of its dividend in the medium term. Lee Kok Chew, M1’s chief commercial officer responded:

“No, I think we also take into consideration sustainability.”

It’s worth noting that Lee had expressed the same sentiment on the sustainability of M1’s dividend during the earnings briefing for 2016’s third quarter. But, the final dividend in 2016 was still cut. It appears that M1 will stick to the 80% dividend payout ratio. So, if net profit falls, the dividend is likely to follow – like what we saw in 2016.

Tan had more comments as more questions on M1’s dividend flew in:

“[W]e adopt for prudent as well is a sustainable approach. And so we have maintained it as at least 80%. Whether we can fund that, our balance sheet to answer your question, it’s very healthy. Our net debt to EBITDA is only slightly above 1 time, 1.2. And I think if necessary, it can increase further.”

What Tan is suggesting above is that M1 might take on more debt to cover all its needs, including future investments and dividends; he thinks the company’s balance sheet is robust enough to allow for more borrowings.

There were more thoughts from Tan:

“From a prudent standpoint, 80% [referring to the dividend payout ratio] allows us also to continue to reinvest into the business, both to strengthen our core as well as to look into new opportunities, revenue stream in the IoT [internet of things] area.

So I think we have taken everything into consideration. So a strong balance sheet, a steady dividend policy and we are looking forward also to ensure that we continue to reinvest into our business.”

The final point could be what investors should expect in the future. M1 will need to balance a few things: Keeping a strong balance sheet; reinvesting in its business to grow; and distributing a sustainable dividend to shareholders.

The three priorities are competing for M1’s cash flow resources, and that’s something investors may want to keep an eye on.

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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.