What Does M1 Ltd’s Profit Tell Investors About Its Dividend?

M1 Ltd  (SGX: B2F)  is the smallest operational telco in Singapore.

The company has a long record of paying an annual dividend that stretches back to at least a decade. But this raises a crucial question: Is M1’s dividend sustainable? The question gains even more importance when we consider the fact that the telco’s dividend in 2016 had declined by 16% compared to 2015.

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 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 M1’s revenue, net profit, and net profit margin from 2012 to 2016:

Source: M1’s financial statements

Although there was no growth in M1’s revenue for the period we’re studying, its net profit margin was stable, thereby resulting in a net profit that also remained flat. Stable net profit margins are a good thing to see, but it’s worth noting that 2016 saw M1’s profit fall by a steep 16.2%.

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) M1 has been paying more in dividends than it has generated in free cash flow over its last five fiscal years.

2) The company has a weak balance sheet given its low cash balance sheet and high debt to shareholders’ equity ratio.

(I had earlier shared the links for the analyses of M1’s free cash flow and balance sheet strength. Here they are again for convenience: free cash flow and balance sheet strength.)

In summary, M1 is a telco with insufficient free cash flow to support its dividend, and a weak balance sheet. So, the probability that M1 can sustain its current dividend in the future looks low.

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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.