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5 Worrisome Trends That Investors Should Know About M1 Ltd’s Business

M1 Ltd  (SGX: B2F) is an easily recognisable company in Singapore, given that it’s our island nation’s third largest operational telco.

One of the things that I like to do when analysing a company is to study its track record. The past is no guarantee of the future. But historical information is the most reliable thing that we can use as our basis to forecast what lies ahead.

And this brings me to five trends that investors should note about M1’s business. Unfortunately, all of them are negative. In a previous article, I had discussed three of these trends, namely, M1’s falling profits, rising gearing, and ineffective capital expenditures. In this article, I’ll share the remaining two.

Falling free cash flow

Free cash flow is the leftover cash a company has generated after it has paid its bills and reinvested capital to maintain the current state of its business.

How much free cash flow a company has will determine the resources it has to: (1) invest in its business for growth; (2) strengthen its balance sheet; or (3) return cash to its shareholders in the form of dividends and/or buybacks. The idea here is simple. The higher the free cash flow a company can generate, the more options it has to rewards its shareholders, be it in growing its business or returning the excess cash to shareholders.

In the case of M1, the trend in its free cash flow over the past few years does not look healthy. From 2013 to 2017, M1’s free cash flow has declined by around 40% from S$176 million to S$107 million.

The decline in M1’s free cash flow has had a detrimental impact on its shareholders. The most obvious one? Lower dividends, which brings me to my fifth trend.

Falling dividends

One key metric for investors to look at when studying a company is the company’s track record in paying a dividend. Ideally, the company should have a long history of consistently growing its dividend.

This has certainly not been the case with M1. In 2014, the telco paid a dividend of S$0.189 per share, up 36% from 2013’s dividend of S$0.139. But from 2014, M1 reduced its dividend in 2015, 2016, and 2017. In fact, the company’s dividend of S$0.114 per share in 2017 is 18% lower than in 2013.

M1’s declining dividend is not unexpected, given that the company has seen lower profitability, higher capital expenditures, and lower free cash flow.

The Foolish conclusion

Disruptive changes in the telco industry in the past few years – such as the proliferation of apps that allow calls to be made and texts to be sent – has significantly affected the businesses of the incumbents.

M1, the smallest of the three operational telcos in Singapore as mentioned earlier, has experienced tremendous pressure on its business. This is evident from the five negative trends that I have pointed out.

The biggest issue that investors need to focus on with M1 is not the negative trends themselves (they are backward-looking anyway), but whether the trends will continue in the future. If they do, it is likely that M1’s investors will suffer from a lower stock price and dividend in the years ahead.

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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.