StarHub Ltd’s (SGX:CC3) has guided towards a dividend of 16 cents per share in 2017, a 20% cut from the previous year. For context, StarHub has been paying out an annual dividend per share of 20 cents since 2010. The dividend cut comes as an unwelcome change for investors, prompting question during its annual general meeting (AGM). The management’s responses were captured in the AGM minutes. It’s an admirable effort, and one worth reading through. I would like to highlight three responses from StarHub’s management team. 1….
StarHub Ltd ’s (SGX:CC3) has guided towards a dividend of 16 cents per share in 2017, a 20% cut from the previous year.
For context, StarHub has been paying out an annual dividend per share of 20 cents since 2010. The dividend cut comes as an unwelcome change for investors, prompting question during its annual general meeting (AGM). The management’s responses were captured in the AGM minutes. It’s an admirable effort, and one worth reading through.
I would like to highlight three responses from StarHub’s management team.
1. The three-year guidance
StarHub’s latest annual report included this comment from chief financial officer Dennis Chia:
“The Board takes a forward three-year view of our earnings, free cash flow, growth prospects, investment needs and an optimal balance sheet. The appropriate level of dividend payment is determined by the combination of these factors. Their preference is to make sustainable payments.”
From the AGM minutes, this view was reiterated:
“In response to Mr Stephen Chen Weng Leong (“Mr Chen”), Chairman informed that the Board took a forward-looking 3-year view on the dividend policy. If the information and market conditions were to change, the Company would make the necessary adjustments accordingly.”
StarHub may have some space to change its mind in terms of its three-year dividend guidance. To be sure, in its first-quarter earnings report, Chia said that StarHub has not changed its guidance for four cents per quarter based on current information.
2. Dividend payout factors
On another note:
“In response to Mr Chen’s query on the decrease of the free cash flow, the sustainability on the dividend payment and the growth of the Company, Chairman explained that the Company took into consideration all known factors for the Company’s growth, cost and capex reduction.
The Company looked at the combination of earnings, future investments, free cash flow and optimal capital structure which gave the Company a clearer picture of the headline level the Company could grow.
The Board took the dividend policy seriously.”
StarHub’s free cash flow declined from $215.7 million in 2015 to $184 million in 2016. A spectrum payment of $80 million in 2016 was partly responsible for the fall in free cash flow. The board’s response to the factors that affect the dividend was consistent with Chia’s comments in the annual report.
3. Spend, spend, spend
StarHub’s capital expenditure is expected to rise in the coming years. The telco is expected to spend $349.6 million in spectrum costs where $68 million (for the 900 GHz band) is due in 2017 while the rest (700 GHz band) is due six months before the spectrum’s availability. The AGM minutes had this note:
“Mr Heah Min An commended the Board of Directors and Management team on their hard work. He noted that the Company had raised approximately S$300 million from the issuance of a 10- year medium term note and queried the Company’s plans to use this raised funding. CFO clarified that the funding would be used to finance the long-term capital requirements such as the spectrum auction.”
In other words, StarHub has taken on $300 million in medium term notes to fund the spectrum cost. The telco has also indicated that it is comfortable with the debt level:
“A shareholder raised his concerns about the borrowing level and queried how the Company managed its debt level. CFO stated that the Company’s net debt to EBITDA level as at 31 December 2016 was relatively low compared to other telecommunication companies. The Company had a good mix of short term and long term debts.”
StarHub’s business is not without its challenges. We will have to continue to watch how the business performs in the future.
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.