StarHub Ltd’s Quarterly Dividend: By the Numbers

In StarHub Ltd’s (SGX: CC3) 2016 fourth quarter earnings, management guided towards a quarterly dividend of $0.04 per share for 2017. This represented a 20% decline from 2016’s quarterly dividend of $0.05 per share. In fact, StarHub had been paying a dividend of $0.05 per share in each quarter since the third quarter of 2009.

The telco ended up doing just that in its 2017 first quarter earnings – it proposed a quarterly dividend of $0.04 per share.

But given the lower dividend in the first quarter of 2017, some investors may be wondering if the new level of dividend can be sustained. Let’s take a look at StarHub’s numbers for some clues.

By the numbers

As investors, we would prefer to have a company’s dividends be funded from its free cash flow.

So, let’s start by studying how much StarHub will have to pay for its dividends. The telco’s diluted weighted average number of shares in the first quarter of 2017 was 1.73 billion. With a dividend of $0.04 per share, StarHub will have to cough up around $69 million.

And how much free cash flow did StarHub generate?

For the first quarter of 2017, StarHub produced $150.2 million in operating cash flow. It also spent $33.7 million on capital expenditures. When we deduct the capital expenditure from operating cash flow, StarHub thus generated $116.5 million in free cash flow. Based on this figure, StarHub has enough free cash flow to cover its dividend.

But, StarHub will be spending more on capital expenditures as the year progresses.

Spend, spend, spend

In StarHub’s 2017 first quarter earnings presentation, its chief executive officer, Tan Tong Hai, said:

“And the percentage of CapEx to revenue is at 5.7%, much lower than what we’ve guided at 13% without the spectrum. But we expect this will catch up in subsequent quarters.”

In other words, StarHub expects to spend more on capital expenditures in the coming quarters. But that’s not all – there is also the matter of spectrum payments that StarHub will have to make.

The telco’s chief financial officer, Dennis Chia, broke down the numbers for the spectrum cost during the earnings presentation:

“Okay, on the spectrum costs that we were awarded, the total amount was $349.6 million to be exact. Of that, approximately $68 million is in respect of the 900 and 2.5 gigahertz band. Those are – that payment of $68 million is due this year and as mentioned earlier, the payment for the 700 band will be made six months prior to the date of availability of that spectrum, whenever that would be.

So if the date of availability would be on 1 January 2018, then the payment would then be due six months prior to that, which is 1 July. If it falls somewhere in the second half of 2018, then the payment of that $282 million will be due sometime in the beginning of 2018.”

StarHub has a spectrum payment of $68 million which will definitely be due sometime this year. There may even be a payment of $282 million to be made in the second half of 2017, depending on when certain spectrum bands are available. For context, StarHub had $401.2 million in cash and equivalents and total borrowings of $987.5 million as of 31 March 2017.

More debt?

Meanwhile, StarHub has increased its financing options and is looking to raise cash for its balance sheet.

In May, the telco updated its multicurrency medium term note (MTN) programme from $1 billion to $2 billion. Following the increase in the debt facility, StarHub has moved to issue $200 million in perpetual securities (under the MTN programme) with a distribution yield of 3.95% per year. StarHub has earmarked the funds from the issue of the perpetual securities to refinance existing debt and to finance new acquisitions, capital expenditure, and working capital.

Investors will have to see what the next few quarters bring in terms of StarHub’s spending and operating cash flow.

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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.