Investment Moats

Superb 2nd Quarter 2011 Free Cash Flow from Starhub

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I think readers of my blog would have seen quite a fair bit of posts on Singapore Telecom shares Singtel, Starhub and M1 Limited.

The consensus from the public is that Singtel provides low but growing dividends, Starhub provides high dividends that will eventually need to come down as it is unsustainable and that M1 is the most attractive of all.

I have written time and again why Starhub’s debts is not unsustainable. [Explanation here] Starhub’s debt to equity ratio is high because their equity is very very very small.

A better measure for telecom shares as illustrated in my last article could be Net Debts over Operating Cash Flow.

Today Starhub released their 2nd Quarter 2011 results.

  1. Results
  2. Presentation Slides

Better Operating Cash Flow

Profit from operations improved. On first glance operating revenue for qtr 2 improved only 0.1%

The kicker for Starhub was that operating expenses improved 3.1%. That’s not a lot you say but the combination created a 22.6% improvement in profit from operations.

Finance Expenses and Income also greatly improved.

We look back and remember what Starhub’s CEO said about the difficult times when Starhub subsidized greatly their iPhone to compete with Singtel. Back then, he mentioned that they would rather expense this operating cost earlier and enjoy the long term income next time.

Now we could be seeing the fruits of his labor.

A big improvement to free cash flow

Starhub’s Operating Cash Flow for this quarter was 181 mil compare to 154 mil last year. Capital Expenditure stayed roughly the same.

The result of this is that Free Cash Flow for the quarter improved from 110 mil to 140 mil.

For the half year, free cash flow improve from 233 mil to 273 mil.

An improvement to Net Debt Position

Probably to silence the critics who say that debts is not sustainable, Starhub have been paying down the debts these years.

Bank loans totaled 750 mil versus 805 mil last year. Cash totaled 270 mil vs 237 mil last year. In total, net debt improved to 480 mil versus 568 mil last year.

How significant is 480 mil? It is estimated that Operating Cash Flow this year could be 700 mil and free cash flow could be 540 mil. This means that their free cash flow could clear their debts in 1 year.

The Significance of the free cash flow improvement

If Starhub maintains their good performance through the second half of the year, we could be looking at a free cash flow of 540 mil.

This 540 mil can go to pay down their net debt of 480 mil or to pay out more dividends.

More dividends? Now we know that what attracted a lot of people was the 20 cent dividend payout. People was questioning whether it is sustainable.

To payout 20 cent, Starhub have to pay out 340 mil. Now with a free cash flow of 540 mil we can safely say they have no problems meeting this 20 cent dividend.

If Starhub wants to use the full free cash flow to pay dividends, they could improve dividend payout by 58%. This would roughly mean they can pay out 31.6 cents in dividends.

At my average price in my current portfolio of $2.54, my yield would have been 12.44%.

My first purchase was at $2.10 and I do know a lot of folks who have it around that or below. Our yield on those purchase would have been 15% in 1 year!

Now these are estimation and I am sure Starhub will not pay out so much. But it is good to know that even if they do not pay us, it goes to paying down debts or keeping as cash for other purposes.

I was stupid to sell part of it at 2.69 but bought back again at 2.69. If Starhub continues to improve like this, then I am sure the share price would appreciate as well.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Free Cashflow Yield incorporated into Dividend Stock Tracker

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I recently received some advice from readers of what they want to see in my Dividend Stock Tracker. I do take their advice seriously under considerations but I would like to take things one step at a time to improve it.

The objective of the tracker still remains as an accessible page to track all Blue Chip and Large Dividend Yielding Stocks on the SGX.

I try to incorporate what I think are important indicators to good dividend companies and one of the things that I am not too pleased with the old Tracker was the use of Net Operating Cashflow (NOPAT).

I wrote in the past on what is the difference between Operating Cashflow, EBITDA, Earnings and Free Cashflow. For readers who want to know in depth about this can view the article here.

Why use Free Cashflow

In the past when I use operating cashflow, it is a good indicator of how much hard cash the company was bringing in. However, the cash brought in is not just to pay dividends but

  1. To buy plants and equpiments or replace them as capital expenditure (CAPEX)
  2. Pay off existing debts
  3. Payout as dividends
  4. Retain as cash in company

Comparing Operating Cashflow Yield vs Dividend Yield is not a good reflection as most company (other than REITs) have a level of CAPEX.

Only after paying for CAPEX do we know how much “free” cash the company have to maneuver.

So essentially Free Cashflow (FCF) = Operating CF – CAPEX

So how do we use it? For me I use it

  • as a starting indication of whether a company is paying out more dividends then they are bringing in.
  • to find companies with good free cashflow growth rate. Take a look at companyes like Google and Microsoft.

Case Study: VICOM and SPH

Both these stocks provide a nice dividend yield on my dividend stock tracker. VICOM at 4.5% and SPH at 6.3%.

So if we are looking for yield then of course we would choose SPH right?

Vicom’s cashflow after taking into consideration capital expenditure is 7.2%. This means that if they don’t want to retain cash or pay off debt level, they can actually pay out 7.2% dividend yield based on how much they earn.

They even have a low payout ratio at 42% ( A note: my payout ratio is payout of operating cashflow instead of net income)

SPH on the other hand have a free cashflow yield of 5.1%. This means that it is paying out more than its earned after factoring capex.

So where did the 6.3%-5.1% = 1.2% yield come from? That, for a company can come from

  1. Existing Cash Holdings ( See Balance Sheet)
  2. Take on more debts ( See Cashflow Statement under Financing)

Its payout ratio is high at 115% as well.

If you ask me, I would say Vicom looks the safer dividend since it has been operating within its capital structure better.

Conclusion

With this in place, you can see a lot of stocks on the stock tracker with red free cashflow. what does this mean? If the dividend payout is more than free cashflow, its flaged as red in color.

There are even companies with negative free cashflow like SP Ausnet.

Hope this is helpful.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.