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M1 Ltd’s 2016 Dividend Is Cut: By the Numbers

Local telco M1 Ltd (SGX: B2F) revealed a 15.6% cut in its 2016 dividend last month.

This is the third time in as many years that M1 has cut its dividend. For context, M1 paid out a dividend of 21 cents per share in 2014 (including a 7.1 cents special dividend). For 2016, M1 will be paying out 12.9 cents per share.

The consecutive declines may raise the following question in investors’ minds: Can the company maintain its dividend? Let’s take a look at some of the important numbers.

By the numbers

In 2016, M1 generated $334.9 million in operating cash flow. The company also spent $140.5 million on capital expenditures and $64.1 million on the purchase of spectrum rights. If we exclude the spectrum rights purchase, M1 produced $194.4 million in free cash flow in 2016; with the spectrum rights purchase, M1 had $129.6 million in free cash flow.

As investors, we would prefer to have our dividends funded from free cash flow. So, let’s turn to how much M1’s dividend would cost.

The telco’s adjusted weighted average number of shares (diluted) in the fourth quarter of 2016 was around 930 million. With a dividend of 12.9 cents per share, M1 would have to fork out roughly $120 million. In other words, if M1 is able to maintain its free cash flow at $194.4 million, it can cover its dividend-cost of about $120 million easily.

But this assumption hangs on M1’s ability to maintain its future free cash flows at 2016’s level. This might not be the case.

Spend, spend, spend

In M1’s 2016 fourth quarter earnings call, the company’s chief commercial officer, Lee Kok Chew, provided a forecast for M1’s capex for 2017:

“We estimate CapEx to be around $170 million. The increase is mainly due to one-off projects such as NB-IoT network upgrade, data analytics and other ICT-related CapEx of which associated revenues will accrue in the future.”

In other words, M1 expects to spend more in 2017 compared to 2016. The increase in capex will eat into M1’s free cash flow for the current year. M1 has also not included any spectrum auction payments for the $170 million capex guidance.

When asked about how M1’s dividends will be supported, the company’s chief financial officer Nicholas Tan said:

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.”

M1’s chief executive officer, Karen Kooi, also signalled her willingness to maintain a higher level of debt to fund investments for the future. She said:

“Okay, we’ve always said we were comfortable with 1 to 1.5 times. And typically, we tend to stay on the low end of that range.

But it might be when investment or we investing back into business is justified we are prepared and able and willing to go up to 1.5 times. And again, looking at investing for the future, investing to capitalize opportunities in the new digital space we are prepared to be even more — to work our balance sheet harder if necessary.”

To be sure, the $170 million capex guidance for 2017 includes a number of one-off items. Tan said that the one-off items for the year add up to $30 million and he expects M1’s capex to soon normalize to a level of around $140 million per year.

In short, M1 will likely spend more in the short term which will add to its debt position. The financial figures may get uncomfortable for a while, but if M1 pulls back on its spending, its free cash flow could be better again.

Investors will have to watch whether M1’s investments actually pay off down the road.

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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.