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What Does Singapore Telecommunications Limited’s Free Cash Flow Tell Investors About Its Dividend?

Singapore Telecommunications Limited (SGX: Z74) is a huge company in many ways. It is the largest telecommunications company in Singapore; it is the largest primary-listing in Singapore’s stock market; and it has 640 million mobile customers.

One trait about Singtel that may appeal to income investors is its long track record of paying an annual dividend. It’s a record that is easily over 10 years long. But that is then and this now. Can Singtel sustain its dividend in the future?

Unfortunately, there is no easy answer.

That said, 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 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 to maintain its businesses at their current state. The 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 Singtel’s free cash flow and dividends paid have changed from its FY2012 (fiscal year ended 31 March 2012) to FY2016:

Singtel free cash flow and dividends paid
Source: Singtel’s annual reports

We can see that Singtel had paid more in dividends than the free cash flow it generated in only one year – that would be FY2012 – for the timeframe we’re observing. Moreover, the high dividend seen in FY2012 was due to a one-off S$1.6 billion special dividend.

In all though, Singtel has definitely managed to pay a dividend that’s within its means. The total dividends paid from FY2012 to FY2016 amounted to S$14.8 billion, but the free cash flow generated by the telco is S$16.7 billion.

Yet, there’s a risk investors should pay attention to: The trend of a decline in the company’s free cash flow.

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 second is something we have just studied for Singtel. As for the first and third, it turns out that:

1) Singtel’s revenue and profit have been declining over its last five fiscal years.

2) The company’s balance sheet is reasonably strong with room to borrow further if necessary.

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

In sum, Singtel appears to have a high probability of being able to sustain its dividend given its decent balance sheet and its ability to generate free cash flow that’s higher than its dividends.

But with everything being said, do also bear in mind that there are other important aspects about the stock to investigate, as I had mentioned earlier, when it comes to assessing the sustainability of its dividend.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

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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.