Singapore Telecommunications Limited (SGX: Z74) is one of the most recognisable companies in Singapore, given that it’s the largest telco in our local market.
Over the past two years or so, the incumbents in Singapore’s telco market – besides Singtel, there are two others in StarHub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F) – have seen their businesses come under pressure due to competition from communication apps and streaming services. And that’s before they have to contend with the entrance of a fourth telco. In December 2016, the Australia-based TPG Telecom won the bid for Singapore’s fourth telco license. TPG Telecom is expected to launch its mobile service in Singapore in the second half of this year.
As a result, the stock prices of the incumbents have weakened over the past two years. Singtel has not been spared either; over the last 12 months, the telco has seen its stock price fall by 13.6%.
Nevertheless, there are still positive aspects about the company. In fact, I will point out three reasons why investors might want to consider investing in Singtel now.
Though its name suggests that Singtel is a Singapore-focused company, the truth is that Singtel derives most of its income from overseas.
In its financial year ended 31 March 2018 (FY2018), Singtel generated free cash flow of S$3.61 billion, of which only 31.2% came from Singapore. Australia accounted for 27.4% (this comes from Singtel’s wholly-owned Australian telco, Optus), while dividends from Singtel’s regional associates made up the rest. These regional associates include Telkomsel from Indonesia, Airtel from India, AIS and Intouch from Thailand, and Globe from the Philippines.
Singtel’s wide geographic reach means that it is imperative that investors have a more holistic view when analyzing the company’s near- as well as long-term prospects.
Track record of stable dividends
Singtel has a history of paying a stable dividend. In FY2013 and FY2014, the telco paid an annual ordinary dividend of S$0.168 per share. It then raised its ordinary dividend to S$0.175 per share in FY2015, and maintained the ordinary dividend at the same level all the way till FY2018.
In fact, the telco expects to maintain its ordinary dividend for FY2019 and FY2020 at S$0.175 per share, before it reverts to paying a dividend that comes in at 60% to 75% of its underlying net profit.
Singtel’s track record of paying a stable dividend, along with its expectation of maintaining its dividend over the next two years, provides assurance for investors about its payouts. Moreover, Singtel’s ordinary dividend of S$0.175 per share in FY2018 is just 79.5% of its free cash flow per share of S$0.22 in the same year (this is based on its free cash flow of S$3.61 billion in FY2018). This ratio suggests that the telco’s dividend is well-protected.
A low valuation
Last but not least, the decline in Singtel’s stock price has resulted in the telco trading at a rather attractive valuation.
At its current stock price of S$3.23, Singtel has a price-to-book ratio, price-to-earnings ratio, and dividend yield of 1.77, 14.9, and 5.4%, respectively. For Singtel’s PE ratio, I’m using adjusted earnings that removes the telco’s one-off gain from the spin-off of NetLink NBN Trust (SGX: CJLU) in July 2017. For Singtel’s dividend yield, I’m basing it on its ordinary dividend for FY2018.
For context, the PB ratio, PE ratio, and dividend yield for the SPDR STI ETF (SGX: ES3) are 1.21, 11.23, and 2.86%, respectively. I’m using the SPDR STI ETF as a proxy for the market, since it is an exchange-traded fund that tracks the fundamentals of the Straits Times Index (SGX: ^STI). Although Singtel’s PB and PE ratios are higher than the market’s, they are not much higher – furthermore, the telco has a significantly more attractive dividend yield.
A Foolish conclusion
The incumbents in Singapore’s telco industry are disliked by the market at the moment. But, I think investors should not overlook the merits of investing in Singtel now. As mentioned above, the telco has a geographically diversified business, a strong track record of paying a stable dividend, and an attractive valuation.
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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.