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

Profit history

A company’s profits are an important source of its dividends. And as we know, profit is what is left when we deduct a company’s costs from its revenue. So, ideally a company should have:

  1. A track record of steady revenue growth
  2. A track record of growing profits and a stable or rising profit margin

The following’s a table showing StarHub’s revenue, net profit, and net profit margin from 2012 to 2016:

StarHub net profit table
Source: StarHub’s financial statements

There are a few observations we can draw from the table above.

Firstly, StarHub’s revenue has been essentially flat for the timeframe under study. There have been no big fluctuations in revenue. Secondly, its net profit margin managed to increase to 15.7%  in 2013, only to then fall steadily to 14.2% in 2016; this has resulted in the company’s profit having fallen from S$359.3 million in 2012 to S$341 million in 2016.

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 second and third, it turns out that:

  1. StarHub has been paying dividends that are not within its means.
  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 free cash flow and balance sheet strength. Here they are again for convenience: free cash flow 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.