The Motley Fool

Why I Think Singtel’s Dividend Yield of 5% is Not Sustainable

Singapore Telecommunications Limited (SGX: Z74) (Singtel) is a popular dividend stock for many investors. It has a high dividend yield of 5.3% at its current share price of S$3.33 (as of the time of writing). The dividend yield is also superior to that of the Straits Times Index (SGX: ^STI).

Its dividends have grown over the years, from 12.5 Singapore cents per share in FY2008 (financial year ended 31 March 2008) to 17.5 Singapore cents per share in FY2019. However, its latest dividend and, subsequently, its dividend yield do not look sustainable to me. Here’s why.

A look at the past

I gathered the dividend payout details from Singtel over the past six fiscal years and compiled them into the table below.

  FY2014 FY2015 FY2016 FY2017 FY2018 FY2019
Underlying earnings per share

(S$ cents)

22.7 23.7 23.9 24.1 21.7 17.3
Ordinary dividend per share

(S$ cents)

16.8 17.5 17.5 17.5 17.5 17.5
Dividend payout ratio 74.0% 73.8% 73.2% 72.6% 80.6% 101.1%

Source: Company earnings; author’s compilation

In its FY2018 annual report, Singtel noted that it “expects to maintain its ordinary dividends at 17.5 cents per share for the next two financial years and thereafter revert to the payout ratio of between 60% to 75% of its underlying net profit.”

From FY2014 to FY2017, Singtel maintained its dividend payout in the range of 72% to 74%. However, in FY2018, the ordinary dividend per share was above the payout ratio range of between 60% and 75% of underlying net profit, and in FY2019, the dividend payout was above 100%.

A look into the future

In its FY2019 earnings release, Singtel reiterated its dividend payment for FY2020:

“Barring unforeseen circumstances, it expects to maintain its ordinary dividends at 17.5 cents per share for the next financial year ending 31 March 2020.”

If underlying net profit were to fall or stay constant in FY2020 as compared to FY2019, the dividend payout ratio would remain above 100% at an ordinary dividend payment of 17.5 Singapore cents per share. That’s not sustainable for the long term. To maintain the dividend payout ratio of between 60% and 75% of underlying net profit, one of two things have to happen; either 1) earnings have to rise significantly, or 2) dividends have to be cut from FY2021 onwards.

For the dividend payout ratio to come back down to 75% of underlying earnings to maintain the 17.5 Singapore cent dividend, underlying earnings per share (EPS) has to rise by around 35% in FY2021. That could be a tall order given the falling underlying EPS in the last two financial years and fierce competition in the telco space.

Assuming there’s no growth in the underlying earnings per share in FY2020 and FY2021 (i.e., underlying EPS at 17.3 Singapore cents), the dividend would fall to 12.98 Singapore cents per share at a 75% payout ratio. The current share price of S$3.33 would mean a hypothetical dividend yield of 3.9%. Of course, there’s also a possibility of underlying EPS falling below 17.3 Singapore cents. If that happens, Singtel’s dividend could fall even further.

The Foolish takeaway

Looking at it from many angles, given the high dividend payout ratio and intense competition in the telco market, Singtel’s current dividend yield of 5.3% is not sustainable, in my opinion. Singtel is venturing into other areas such as payment and eSports to capture some of the growth in those sectors but it remains to be seen how much in earnings those ventures can generate for Singtel’s coffers.

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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.