The More Attractive Telco Dividend Stock: Singapore Telecommunications Limited or M1 Ltd?

Singapore Telecommunications Limited (SGX: Z74) and M1 Ltd (SGX: B2F) are two major telecommunications firms operating here. Singtel is the largest of the herd with 49% of the mobile market share in Singapore whereas M1 is the smallest with 24% of the pie.

Both Singtel and M1 offer dividend yields that are high and therefore, could make good income stocks. However, which of the two would be a more attractive buy? To help answer that, I will compare the firms’ dividend yields, dividends historical growth rates, and dividend payout ratios.

Dividend yield

Singtel has a trailing dividend yield of 5.37%, based on the current share price of S$3.26. The dividend yield excludes any special dividend.

M1, on the other hand, sports a trailing dividend yield of 6.95%. The yield is based on the current share price of S$1.64.

Looking at the dividend yield alone, M1 appears to be the better buy.

Dividend growth rate

The dividend yields merely tell us what the telcos have paid over the last twelve months. However, we should also look at their track record of growing their dividends over the past few years.

Singtel has grown its total ordinary dividends from 16.8 Singapore cents per share in 2014 to 17.5 Singapore cents in 2018 (the company has a 31 March year-end). In 2018, it also paid 3.0 Singapore cents in one-off special dividend from its NetLink Trust divestment.

Pictorially, this is how the dividend growth looks like over the past five years:Source: Singtel 2018 annual report

Meanwhile, in the last five years, M1 has reduced its total ordinary dividends from 13.9 Singapore cents per share in 2013 to 11.4 Singapore cents in 2017 (M1’s year ends on 31 December). In 2013, the telco paid out 7.1 Singapore cents in special dividend.

The following shows the dividend decline for M1 from 2013 to 2017:Source: M1 2017 annual report

With regards to the dividend-growth track record, Singtel clearly triumphs over M1.

Dividend payout ratio

Beyond the trailing dividend yield and dividend growth rate, which focus on the past, we should also assess whether the telcos can sustain their dividends going forward. To do that, we can compare their free cash flows to the amount that they pay out as dividends.

I prefer companies which keep their dividend payout ratio below 100% as it leaves some room for dividend increases in the future, even with stagnant free cash flows.

In 2018, Singtel’s free cash flow stood at S$3.61 billion. It paid out S$2.86 billion in dividends for the year, excluding the special dividend. Including the one-time dividend, it paid out S$3.35 billion in all.

Singtel’s dividend payment with special dividend translates to a dividend payout ratio in terms of free cash flow to be 92.8%. If we were to exclude the one-off dividend, the dividend payout ratio drops to 79.2%.

In comparison, M1’s free cash flow was S$106.7 million in 2017. For the year, it paid out S$105.8 million in dividends. In terms of free cash flow, it paid 99.2% of it as dividends.

Even though both telcos have a dividend payout ratio of below 100%, Singtel offers a far superior margin of safety as compared to M1.

A Foolish takeaway

Investing based on dividend yield alone is risky. We should go beyond the dividend yield and analyse whether the firm can sustain its dividends in the future. We do not want to be investing in a company that yields an attractive 10% but is forced to cut its dividends drastically that the yield drops to 1% the next year.

Analysing Singtel’s and M1’s dividends, it looks like Singtel is a more appealing income stock, due to its better dividend growth rate and lower payout ratio.

[Editor’s note: A similar comparison of Singtel’s and StarHub Ltd’s (SGX: CC3) dividends has been done, and it can be found here.]

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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.