Is StarHub Ltd’s Dividend Safe?

In early February, Singapore’s second-largest operational telco, StarHub Ltd (SGX: CC3), released its 2016 fourth quarter earnings and proposed a final dividend of S$0.05 per share to bring its total dividend for the year to S$0.20 per share.

But, the telco also revealed in its earnings that it intends to pay a quarterly dividend of S$0.04 per share in 2017, which works out to S$0.16 for the whole year, a figure that’s 20% lower than 2016’s dividend.

With the expected 20% cut in the dividend comes a big question: How safe is StarHub’s dividend?

Let’s look at three charts that I think can give investors important insight into the safety of the telco’s dividend.

The first chart we’re going to study, Chart 1, plots StarHub’s dividend per share from 2006 to 2016. There are a few positive takeaways from the chart.

Firstly, StarHub has managed to consistently pay an annual dividend for the decade under study. Secondly, the company’s dividend in 2016 is nearly 74% higher than in 2006. And lastly, StarHub has kept its pay-out at a level of S$0.20 per share for seven years from 2010 to 2016, which is a solid track record.

Chart 1 - StarHub's ordinary dividend from 2006 to 2016
Source: S&P Global Market Intelligence

Chart 2 is the second chart we’re going to observe and it illustrates StarHub’s operating cash flow per share, free cash flow per share, and dividends per share from 2006 to 2016.

Dividends are ultimately paid with cash and that cash can be obtained by a company in a variety of ways, such as (a) borrowing from banks and/or investors, (b) issuing new shares to investors, (c) selling assets, and (d) collecting the cash generated from its businesses.

Options (a) to (c) are not sustainable over the long-run, which leaves us with the fourth option. This is why it is important to watch a company’s free cash flows. It is the actual cash flow from a company’s business that’s left after the firm has spent the capital necessary to maintain its businesses at their current states. The more free cash flows a company can produce in the years ahead, the higher the potential for fatter dividends in the future.

What Chart 2 shows is worrying. The past few years has seen StarHub’s operating cash flows decline. Because of growing capital expenditure, StarHub’s free cash flow has declined at even faster rates. Although it’s admirable that the company has managed to generate positive free cash flow in each year under study, the decline is a source of concern.

Moreover, StarHub’s free cash flow of S$0.107 per share in 2016 is lower than its dividend (this is shown clearly in Chart 2); it is also lower than the expected dividend of S$0.16 per share in 2017.

Chart 2 - StarHub's dividend, operating cash flow, and free cash flow per share from 2006 to 2016
Source: S&P Global Market Intelligence

We’re down to the last chart, Chart 3, and it plots StarHub’s net-debt (total borrowings and capital leases minus cash and short-term investments) position for the same timeframes as the previous two charts.

Guarantees do not come along with dividends. A company with a weak balance sheet can easily reduce or eliminate its dividend if its business runs into difficulties in order to meet creditors’ demands or protect its financial health.

In Chart 3, we can see that StarHub has a significant net-debt position (S$702 million to be exact) and that is a sharp increase over what’s seen in the past few years.

Chart 3 - StarHub's net-debt position from 2006 to 2016
Source: S&P Global Market Intelligence

Based on the three charts alone, StarHub’s dividend does not look safe to me. Although the company has a solid track record when it comes to paying a dividend, it has a big net-debt position and has seen its free cash flow dwindle drastically in recent years.

All that being said, it’s also important to carefully consider the prospects of StarHub’s business – something I did not do in this article – before any firm investment decision can be made. Take all you’ve seen here about the company simply as a useful starting point for further research.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.