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What Does StarHub Ltd’s Free Cash Flow 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 second point. For the first and the third, you can check out here and here, respectively.

Free cash flow

For a company to be able to sustain its dividend payments, it must be able to generate cash to pay its bills and maintain its businesses at their current state. Left over cash can then be used to pay out dividends.

In the financial community, that left-over cash is known as free cash flow and it is found by subtracting a company’s capital expenditure from its cash flow from operations. It is not sustainable over the long-term for a company to pay out more in dividends as compared to the free cash flow it generates.

Here’s a chart showing how StarHub’s free cash flow and dividends paid have changed from 2012 to 2016:

StarHub free cash flow chart
Source: StarHub’s financial statements

And for those who are interested in how the numbers are derived, please see the table below:

StarHub free cash flow table
Source: StarHub’s financial statements

From the table above, we can see that StarHub’s free cash flow has fallen steadily for the period we’re studying, yet its dividend payments have been sustained.

More importantly, the company’s dividend has exceeded the free cash flow generated for four of the five years under study. All told, from 2012 to 2016, StarHub dished out a total of S$1.39 billion in dividends whilst generating S$1.18 billion in free cash flow. The gap of about S$211 million has been funded mainly from an increase in the company’s borrowings.

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 third, it turns out that:

  1. StarHub’s revenue has been stable, but its profits and profit margins have been declining.
  2. The company has a decent balance sheet with room to take on more borrowings.

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

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.