What Does StarHub Ltd’s Balance Sheet Say About Its Dividend?

StarHub Ltd (SGX: CC3) is a company many investors are likely to be familiar with for two reasons.

Firstly, it is Singapore’s second largest provider of telecommunications services. Secondly, it has been paying an annual dividend consistently over its last 10 fiscal years.

The second point begs the question: Just how sustainable is StarHub’s dividend? The question also takes on extra significance considering that the company had forecast a dividend of S$0.16 per share for 2017, down from the annual dividend of S$0.20 per share that it has been paying from 2010 to 2016.

Unfortunately, there is no easy answer to the question. But, there are some things about a company’s business we can look at for clues. Here are three of them, keeping in mind that they are not the only important aspects: (1) the company’s profit history, (2) a comparison of the company’s free cash flow and dividend, and (3) the company’s balance sheet strength.

In this article, I will address the third point. For the first and the second, you can check out here and here, respectively.

Balance sheet strength

Dividends are paid out to investors in the form of cash.

In other words, a company must have enough cash in hand or at least have the ability to borrow money (if necessary) to pay its dividend. Generally speaking, a company with a strong balance sheet has the resources needed to help fund its dividend. (It should also be noted that borrowing money to pay a dividend is not ideal.)

To gauge the strength of a company’s balance sheet, there are two things we can look at, amongst many others: A company’s current cash balance; and the company’s debt to shareholders’ equity ratio. In general, we are looking out for a high cash balance sheet and a low debt to shareholders’ equity ratio.

StarHub currently has (latest financials as of 31 December 2016) a cash balance of S$285.2 million. It also has debt and shareholders’ equity of S$987.5 million and S$194.9 million, respectively, giving rise to a debt to shareholders’ equity ratio of 507%.

Although StarHub has a decent cash balance, its debt to shareholders’ equity ratio is high. But, StarHub’s net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratio is still only around 1. Given that most telcos have a net debt to EBITDA ratio of 3 to 4, StarHub can take on another S$1.4 billion in debt and still end up with a net debt to EBITDA ratio of just 3.

These suggest that StarHub has a decent balance sheet – it’s not very strong, but not too weak either.

A Foolish conclusion

Earlier in this article, I had shared three things about a company’s business investors could like at to give them clues on how sustainable the company’s dividend is. The first is something we have just studied. As for the first and second, it turns out that:

  1. StarHub’s revenue has been stable, but its profits and profit margins have been declining.
  2. The company has been paying dividends that are not within its means.

(I had earlier shared the links for the analyses of StarHub’s profit history and free cash flow. Here they are again for convenience: profit history and free cash flow.)

So if I put the three things together, StarHub is a company that has (1) a history of stable revenue but falling profits, (2) a track record of paying dividends beyond its means, and (3) an average balance sheet.

With everything being said, do bear in mind that there are other important aspects about a stock to investigate, as I had mentioned earlier, when it comes to assessing the sustainability of its dividend.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.