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M1 Ltd’s 2017 Dividend: By the Numbers

M1 Ltd (SGX: B2F) is likely to maintain a dividend pay-out ratio of 80% for 2017. By this, I mean that the company is likely to pay-out 80% of its 2017 profit as a dividend for the year.

In 2016, M1 paid out an interim dividend and final dividend of $0.07 and $0.059 per share, respectively. This works out to a total dividend of $0.129 per share for the whole of 2016.

With around 930 million in outstanding shares currently, M1 will need to come up with about $120 million in hard readies for 2017’s dividend (assuming the share count does not increase drastically during the rest of the year) if its profit for the year ends up at the same level as in 2016.

If M1 were to dish out $120 million for its 2017 dividend, is it taking a big risk? Let’s take a look at M1’s free cash flow and balance sheet for some clues.

By the numbers

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

In the first quarter of 2017, M1 generated $48.2 million in operating cash flow. It also spent $49.6 million on capital expenditures. When we deduct the capital expenditures from operating cash flow, M1 thus generated free cash flow of a negative $1.4 million.

The company would need to make up some serious ground in terms of its operating cash flow in the next three quarters of 2017 in order to produce sufficient free cash flow to cover its dividend needs.

Spend, spend, spend

In M1’s 2017 first quarter earnings presentation, its chief technical officer, Denis Seek, shared some comments on M1’s plans for capital expenditures for the whole of 2017:

“We estimate CapEx for the 2017 to be around $150 million and we are likely to maintain 80% dividend payout ratio for the full year.”

M1 spent $140 million on capital expenditures in 2016, which is lower than this year’s expected amount. But there is more that M1 needs to spend on during the course of the year, in particular, on spectrum payments. M1’s chief commercial officer and chief financial officer, Lee Kok Chew, explained:

“Now, the $208 million comprise [$20 million] for the 900 megahertz spectrum and also $188 million for the 700 megahertz spectrum. The 900 megahertz spectrum is likely to be paid this year.

As for the 700 megahertz spectrum, the requirement is for the spectrum payment to be made six months prior to the availability of the spectrum. At the moment, we’re still sitting, final confirmation on the availability of the 700 megahertz spectrum and once that is finalized, we will be able to advice on the payment date.”

So, M1 has a spectrum payment of at least $20 million which will be due sometime this year. There could even be a bill for $188 million in 2017 depending on when certain spectrum bands become available. For context, M1 had $7.5 million in cash and equivalents and total borrowings of $383.7 million as of 31 March 2017. So, the company’s already sitting on some pretty heavy borrowings in relation to cash.

Investors will have to see what the next few quarters bring in terms of M1’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.