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The Better Telco Dividend Stock: Singapore Telecommunications Limited or StarHub Ltd?

Singapore Telecommunications Limited (SGX: Z74) and StarHub Ltd (SGX: CC3) are two of the three main telcos operating in Singapore.

Both Singtel and StarHub offer dividend yields that are high, compared to the market average. As such, investors who are interested in those two companies may be thinking which telco would make a better income stock. To answer that, let’s compare their dividend yields, dividends historical growth rates, and dividend payout ratios.

Dividend yield

Singtel closed at S$3.23 per share on Friday, giving it a trailing dividend yield of 5.4%, excluding special dividends. On the other hand, StarHub last exchanged hands on Friday at S$1.69 per share, translating to a trailing dividend yield of 9.5%. Looking at dividend yield alone, StarHub appears to be the better buy.

Dividend growth rate

The dividend yield tells us what a telco has paid over the last twelve months, but we should also be looking at how the telcos’ dividends have grown over the past five years.

Between 2013 and 2017, Singtel has grown its total ordinary dividends from 16.8 Singapore cents per share to 17.5 Singapore cents. However, over the same time frame, StarHub reduced its dividends from 20 Singapore cents per share to 16 Singapore cents. In terms of track record, Singtel has the upper hand.

Dividend payout ratio

Beyond the trailing dividend yield, we should also assess whether the telcos are able to afford paying the same dividend (or more) in the future. To do that, we can compare its free cash flow to the amount in dividends that it pays out.

I prefer companies which keep their dividend payout ratio to be below 100% because it leaves some room for dividend increases in the future.

In 2017, Singtel’s free cash flow stood at S$3.1 billion. It paid out S$2.8 billion in dividends for the year. This translates to a dividend payout ratio in terms of free cash flow to be 90.3%.

In comparison, StarHub’s free cash flow was S$221.3 million in 2017. For the year, it paid out S$276.6 million in dividends. In terms of free cash flow, it paid out more than 100% of it as dividends.

A Foolish takeaway

StarHub prides itself in being the only local telco that pays dividends every quarter since 2005. It also has a higher dividend yield of 9.5% than Singtel’s 5.4%.

However, the dividend yield is not the only thing that investors should look at as it does not give a complete view of whether StarHub is a good income stock. From the looks of it, StarHub’s dividends does not look sustainable as it is paying out more than it can afford in terms of free cash flow.

Overall, Singtel looks like the better dividend stock to me.

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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 Sudhan P doesn’t own shares in any companies mentioned.