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2 Reasons Why I Am Not Excited About StarHub Ltd’s High Dividend Yield Of 9.2%

StarHub Ltd (SGX: CC3) is a company that needs little introduction, given that it’s one of Singapore’s main telcos.

Over the last 12 months, StarHub’s stock price has declined by 37% to S$1.73 right now. At the current stock price, the telco has a trailing dividend yield of a stunning 9.2%. For perspective, this is three times higher than the 3.0% yield that the SPDR STI ETF (SGX: ES3) has. The SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s stock market benchmark, the Straits Times Index  (SGX: ^STI).

But, crucially, I’m not excited about StarHub’s high dividend yield, and I don’t think investors should be excited too. Here’s why.

Weak business results

In StarHub’s latest earnings update, for the first quarter of 2018, the telco reported that its revenue was down 4.7% year-on-year to S$561.0 million. Worse still, its profit attributable to shareholders fell by 14.9% to S$61.5 million.

The telco’s profit decline is not a one-off occurrence. In fact, from 2015 to 2017, StarHub’s net profit had shrunk by 33% from S$372 million to S$250 million.

For StarHub to sustain or grow its dividend, it must be able to maintain or grow its profit. Otherwise, it won’t be too long before it has to reduce its dividend. And this brings me to the second reason why I’m not excited about StarHub’s 9.2% dividend yield.

A high dividend pay-out ratio

The dividend pay-out ratio is the percentage of a company’s profit that is paid out to investors as a dividend. As a general rule of thumb, a company’s dividend is deemed to be sustainable if its dividend pay-out ratio is comfortably lower than 100%.

Unfortunately, this is not the case for Starhub. In 2017, StarHub paid a total dividend of S$0.16 per share when its earnings was only S$0.14 per share. In fact, with StarHub’s 2018 first quarter earnings per share (EPS) being only S$0.034 – down 19% from 2017’s first quarter – it’s likely that the telco’s EPS for the whole of 2018 would be lower than the S$0.16 per share dividend that it has forecast it would pay for the year. For context, annualising StarHub’s 2018 first quarter EPS would give us S$0.136.

A Foolish conclusion

In sum, I think that investors should not get too excited with StarHub’s high dividend yield. The telco’s business has been deteriorating, and it is paying a dividend that is more than what it is earning. Unless StarHub manages to turnaround its business in the near future, we will likely see a lower dividend from the telco in the next few years.

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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.