A high dividend-yielding company is always sure to attract many investors. However, not all companies with high dividend yields are great. Some have high yields due to poor business fundamentals, and that could result in falling dividend payouts in the future.
The following three companies have got high yields, but I wouldn’t touch them with a ten-foot pole. I explain why below.
Company No. 1
The first company on my list is Asian Pay Television Trust (SGX: S7OU). The trust’s business currently centres around its investment in Taiwan Broadband Communications Group, a leading cable operator in Taiwan. Asian Pay Television Trust’s investment mandate, however, is wide-ranging. Its mandate is to “own, operate and maintain mature, cash generative pay-TV and broadband businesses in Taiwan, Hong Kong, Japan, and Singapore”.
At its current unit price of S$0.172, Asian Pay Television Trust has a trailing distribution yield of 14.7%. The yield is sure to come down as the trust has guided towards lower distributions of S$0.012 per unit per year for 2019 and 2020. Its previous distribution payout was S$0.065 per share.
Asian Pay Television Trust has been hit by challenging business conditions. Coupled with its high level of borrowings, the high distribution of S$0.065 per share was not sustainable. As of 30 June 2019, its net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) was high at 7.9 times, with a low interest cover of 3.5 times.
With a lower distribution payment, and hence cost savings, the trust plans to use its operating cash flows to fund capital expenditure and reduce its dependence on borrowings. As of the time of writing, Asian Pay Television Trust sports a distribution yield of 7%, based on its 2019 distribution guidance of S$0.012 cents per unit.
Company No. 2
I’m putting another business trust, Hutchison Port Holdings Trust (SGX: NS8U), on my list. The container port business trust right now has a trailing distribution yield of 12% at its unit price of S$0.157. But I’m not banking on its high yield.
As mentioned in my earlier article here, Hutchison Port Holdings Trust’s distribution per unit (DPU) has been trending down – from 37.7 HK cents in 2011 to just 17 HK cents in 2018. For its 2019 second quarter, DPU continued its downward trend, falling from 8.52 HK cents in the corresponding quarter last year to 6.00 HK cents.
As for its outlook, Hutchison Port Holdings Trust had the following warning in its latest earnings, which does not bode well:
“Outbound cargoes to the US remained weak in the second quarter of 2019 and it is expected to be volatile in the second half of 2019 as the US/China trade dispute continues. Given the uncertainties in the global trade outlook, HPH Trust management remains cautious about future cargo trends and will continue to adhere to cost discipline and efficiency improvements in order to face the challenges ahead.”
Company No. 3
Singapore’s telco, StarHub Ltd (SGX: CC3), is the final company on my list. As many investors are aware, the telco industry in Singapore is facing heated competition, with Australia’s TPG Telecom recently entering the fray. Earlier this year, Moody’s, a credit rating agency, warned that Singapore telcos would be forced to consolidate within three years as the local market gets more crowded.
StarHub’s pay-TV business is not spared either. It is also facing challenging conditions with strong competition from over-the-counter media services such as Netflix.
It’s hard to make out what StarHub’s future business will look like. With its history of dwindling earnings, high debt load, and a change in dividend policy, I’m extremely wary of StarHub’s high forward dividend yield of 6.7% at its current share price of S$1.34.
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.