The Motley Fool

5 Reasons Why Singapore Telecommunications Limited Looks Like A Safe Investment Now

Singapore Telecommunications Limited (SGX: Z74) is one of the three main telcos in Singapore.

Singapore’s telecommunications industry has come under significant pressure in the last two years, mainly due to the expected change in competitive dynamics amid the entrance of a fourth player, the Australia-based TPG Telecom.

As a result, the incumbents have seen both their financial performance and share price weakening in the past two years. Singtel, the biggest among them, was not spared either. At the current price of S$3.29, Singtel’s shares are down by about 15% over the last 12 months.

Nevertheless, it appears (at least to me) that despite all the challenges, Singtel might be a safe investment now, for the long run. I have five reasons to support my view, and three are given in a previous article of mine. As a quick recap, the three reasons are:

1. A regionally diversified business

2. Strong balance sheet

3. Attractive valuation

In this article, I will share the other two reasons.

Good track record in paying dividends

Singtel has a long history of paying a stable dividend. In FY2013 (financial year ended 31 March 2013) 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, it has raised its dividend by over 40% from S$0.125 per share in FY2008 to S$0.175 in FY2018

Moreover, 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. It’s worth noting too that 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.

Investing for the future

One of the main risks that telcos such as Singtel face is technological changes in their business landscape. With new technologies (such as 4G and 5G, and the proliferation of smartphone apps) appearing at a breath-taking pace, Singtel needs to keep up with these changes in order to remain relevant.

I think the company is indeed keeping up with the shifts. Here’s what Singtel shared in its latest FY2018 annual report on the topic:

“Singtel embarked on a company-wide digital transformation more than five years ago to rebuild our business around data and digital. As digital eroded industry barriers and disrupted old business models, going digital has meant developing strategies that go beyond the context of our telco industry. Instead, we have leveraged our telco assets and customer relationships to develop new businesses such as cyber security, digital marketing and smart city solutions.

We have also begun building a digital ecosystem with our associates to aggregate millions of customers across the region. As digital has revolutionised consumer behaviour and company processes, we have also digitalised our core consumer and enterprise businesses. Our new growth initiatives have grown from strength to strength – our digital and ICT businesses now contribute nearly 25% of Group revenue.”

From the above, we can see that Singtel is not taking technological changes lightly, and it has been working on transforming its business to adapt to the new reality. Of course, there is no guarantee that what Singtel is doing is sufficient to maintain its competitive position in the market. But, the chances look good to me.

A Foolish conclusion

The market dislikes the incumbents in Singapore’s telco industry at the moment. But, given the aforementioned reasons, we can argue that Singtel looks like a safe investment (at least for now).

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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.