StarHub Ltd’s 2017 Dividend to Be Cut: By the Numbers

In local telco StarHub Ltd’s (SGX: CC3) recent 2016 fourth quarter earnings, management guided towards a quarterly dividend of four cents per share for 2017.

This represents a 20% reduction compared to 2016’s quarterly dividend of five cents per share. In fact, StarHub had kept its quarterly dividend at five cents per share since the third quarter of 2009. The change in tack raised questions in investors’ minds on whether StarHub’s new dividend can be sustained.

Let’s take a look at some of the important numbers for StarHub.

By the numbers

In 2016, StarHub generated $550.7 million in operating cash flow. The telco also spent $366.7 million on capital expenditure. Around $80 million of the $366.7 million was for spectrum payments made in the year.

When we deduct the full capital expenditure from operating cash flow, we see that StarHub produced $184 million in free cash flow in 2016. If we exclude the spectrum payments, StarHub would have generated $264 million in free cash flow.

As investors, we should prefer a company to have its dividends funded from free cash flow. So, let’s now look at how much StarHub’s dividend would cost.

StarHub’s adjusted weighted average number of shares (diluted) in the fourth quarter of 2016 was around 1.73 billion. At the new quarterly rate of four cents cents per share (or 16 cents per year), StarHub’s new dividend will cost it a total of $277 million in a year.

The new dividend will be a significant reduction from the $346.2 million in dividend StarHub paid out in 2016. However, the new dividend will still cost more than the free cash flow StarHub generated in 2016. Moreover, StarHub has plans to spend even more on capital expenditure in 2017.

Spend, spend, spend

In the 2016 fourth quarter earnings call, StarHub’s chief executive, Tan Tong Hai, provided a forecast on the company’s capital expenditure for 2017:

“Here’s the 2017 outlook. We expect service revenue to be about 2016 levels. EBITDA margin on service revenue to be between 26% to 28%. Cash CapEx to be about 13% of total revenue, and this excludes spectrum payments.”

In 2016, StarHub spent 12% of its revenue on capex and recorded an EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 31.2%. In other words, StarHub is expected to record a lower margin and spend more in 2017. It’s worth noting too that StarHub’s 2017 capex guidance excludes any spectrum auction payments.

When asked during the earnings call about how StarHub’s dividend will be supported, the company’s chief financial officer, Dennis Chia, said:

“Your other question or your fourth question on the sustainability of dividends, so I think just to reiterate, we believe that number is actually sustainable, although we do believe that if you look at the guidance of EBITDA and the CapEx levels that we expect in 2017, we will have a shortfall.”

As it stands, it looks like StarHub may have to dip into its cash position on its balance sheet to fund its dividend and capital expenditure needs for 2017. As of 31 December 2016, StarHub had $285.2 million in cash and equivalents and total borrowings of $987.5 million. This amounts to a net debt to EBITDA ratio of 1.02 times.

To be sure, Chia also added:

“However, we do believe that we will be able to get cost efficiencies and rationalisations going forward, as well as bring our CapEx down to normalised levels, as we’ve always indicated, at some point in time in the short term, short to medium term, to about 11% to 12%. So we believe that we will be able to sustain that level.

In the meantime, therefore, the levels may go up. However, it would be to a manageable level within the peer group of our Asian telco peers.”

It’s worth noting that the telco had previously guided to spending 13% of its revenue on capex for 2016, but ended up with 12% instead. So, it is possible that StarHub’s capex in 2017 may end up lower than expected.

This would be something that investors have to watch in the coming quarters.

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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.