With a dividend yield that is way higher than the stock market average, StarHub Ltd (SGX: CC3) would be attractive to income-hungry investors. In the telco’s 2017 annual report, its chief strategic partnership officer, Jeannie Ong, mentioned the following when asked why StarHub should be part of an investor’s portfolio:
“We are the only local telco that pays dividends quarterly since 2005 and our dividend yield is one of the highest in the local market.”
However, before you close this article and buy StarHub’s shares for its dividend, take a read to know more about the telco’s dividend, such as its dividend yield, dividend history and most important of all, its dividend sustainability.
On 16 August, StarHub’s shares changed hands at S$1.65 apiece, a price which translates to a mouth-watering dividend yield of 9.7%.
For perspective, the SPDR STI ETF (SGX: ES3) had a distribution yield of 3.5% on the same day. The SPDR STI ETF is an exchange-traded fund (ETF) that tracks the fundamentals of the Straits Times Index (SGX: ^STI), Singapore’s stock market barometer. StarHub is one of the 30 constituents of the Straits Times Index.
StarHub’s dividend yield is also way higher than other its peers in the Straits Times Index. In fact, StarHub has the second highest dividend yield among the 30 Straits Times Index components. The highest yielder is Hutchison Port Hldg Trust (SGX: NS8U), with a distribution yield of 9.8% (as of 16 August).
Dividend amount and payout periods
Currently, StarHub pays 4.0 Singapore cents per share every quarter, which gives a total dividend of 16.0 cents per share each year.
As mentioned earlier, StarHub prides itself in being the only telco in Singapore that pays dividends every quarter since 2005.
The following table shows StarHub’s dividend from 2006 to 2017:
Source: StarHub investor relations website
StarHub either increased or maintained its annual dividend from 2006 to 2016. Even during the great financial crisis in 2008 and 2009, the telco did not cut its dividend. But, in 2017, it chopped its dividend by 20% to 16.0 cents per share from 20.0 cents a year ago.
StarHub intends to pay a quarterly dividend of 4.0 cents per share for the whole of 2018. It has already paid out 8.0 cents per share for the first half of 2018.
In its 2017 annual report, StarHub explained the rationale for its dividend payment policy:
“As the info-communications industry tends to produce lumpy quarterly earnings and to provide certainty to investors, it makes sense for us to announce an absolute dividend payout amount at the beginning of the year rather than a payout ratio based on earnings.
To this end, the Board takes a forward three-year view of our earnings, free cash flow, growth prospects, investment needs and an optimal balance sheets. Our preference is to make sustainable dividend payments. The Board has recommended to pay four cents per quarter per ordinary share in FY2018.”
The chart below shows StarHub’s dividend guidance, as well as the outlook for 2018:Source: StarHub 2018 second quarter earnings presentation
To find out if a company has sustainable dividends, we can compare its free cash flow to the amount in dividends that it pays out. Companies which pay less than 100% of their free cash flow have some room for error, and also has space for dividend increases in the future.
The following shows StarHub’s free cash flow, total dividend paid, and dividend payout ratio (dividend as a percentage of net profit) since 2013:Source: S&P Global Market Intelligence (LTM = last twelve months)
StarHub has a history of paying out a dividend that is higher than both its earnings and free cash flow. This is risky as the telco may have to cut its dividend further to sustain its business and keep its finances healthy.
Dividend yield history
As mentioned earlier, StarHub’s dividend yield was 9.7%, as of 16 August 2018. The last time the telco traded at such a high yield was back in late 2008 to late 2009.
The following chart shows StarHub’s dividend yield from early August 2005 to 16 August 2018:Source: S&P Global Market Intelligence
A peek into the future
So, since the company’s current dividend doesn’t look sustainable as I explained under the “Dividend sustainability” section, what would a sustainable dividend and dividend yield look like for StarHub?
From 2015 to 2017, StarHub had an average free cash flow of around S$200 million. If it has a dividend payout ratio of 80% of its free cash flow, it would pay out S$160 million in dividends. With an outstanding share count of 1.73 billion, the total dividend per year would equate to 9.25 cents per share.
If we were to take a 100% dividend payout ratio, it would be paying out S$200 million in dividends or 11.6 cents per share. Against a stock price of S$1.65, both hypothetical dividends equate to a dividend yield of between 5.6% and 7%, much lower than the current yield of 9.7%.
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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.