Is M1 Ltd’s Dividend Safe?

In late January 2017, Singapore’s smallest operational telco, M1 Ltd (SGX: B2F), released its 2016 fourth quarter earnings and proposed a final dividend of S$0.059 per share.

This brought M1’s overall dividend in 2016 to S$0.129 per share, which is down 15.7% from 2015’s dividend of S$0.153 per share. The lower dividend raises the crucial question for investors: How safe is the company’s dividend?

Here are three charts that I think can provide useful insight on the safety of M1’s dividend.

The first chart is Chart 1, which shows the telco’s total dividend per share from 2006 to 2016. I have two important things to share about the chart.

Firstly, M1 has a history of paying an annual dividend in each year for the decade we’re observing. That’s a good thing to see because the time frame we’re looking at includes the Great Financial Crisis that erupted in 2008. It’s a testament to the strength of M1’s business that it managed to continue paying a dividend even when the global economy was roiled by the crisis.

Secondly, the company’s dividend has been steadily declining since 2013 and that’s obviously not a positive trait. In fact, M1’s 2016 dividend was the lowest for the timeframe we’re studying.

Source: S&P Global Market Intelligence

The next chart would be Chart 2, which plots M1’s operating cash flow per share, free cash flow per share, and dividends per share for 2006 to 2016.

Dividends are ultimately paid with cash and that cash can be obtained by a company in a variety of ways. This include (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 higher a company’s free cash flows can be in the years ahead, the higher the potential for fatter dividends.

What Chart 2 shows is troubling. M1’s free cash flow has mostly come in lower than its dividends in recent years. Moreover, the telco has struggled to grow its free cash flow. In 2016, its free cash flow was around the same level as in 2011.

Source: S&P Global Market Intelligence

Chart 3 is our last chart here and it illustrates M1’s net-debt (total borrowings and capital leases minus cash and short-term investments) position from 2006 to 2016.

There are no guarantees when it comes to dividends. So, if a company has a weak balance sheet, its dividend can easily be reduced or eliminated in the event of any deterioration in its business environment so as to meet demands from creditors or to protect its financial position.

In Chart 3, we can see that M1’s net-debt position started climbing in 2013 and ended 2016 at S$384 million. That’s the highest the net-debt position has been for M1 since 2006.

Source: S&P Global Market Intelligence

Based on the three charts above, M1’s dividend looks risky to me. Although the telco has managed to pay a dividend in each year since 2006, its dividend has declined to a multi-year low. Moreover, it has struggled to grow its free cash flow and has seen its balance sheet weaken considerably in recent years.

All these being said, it’s also important to carefully consider the prospects of M1’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.