At Investment Moats, we have profile telecom shares and list out the fundamental reasons why they make good dividend shares (read article here)
The current dividend yields of the 3 telecom are (daily yield tracked here):
- Starhub: 7.1%
- M1: 7.3%
- Singtel: 4.7%
It may seem that there is no reason to buy Singtel since the yield is 2.3% lower than the other 2.
If we are talking about
- how sustainable are the dividends
- whether there are room for dividend increase
we have to look at free cash flow.
Free Cash Flow
Free Cash Flow (FCF) (Detail explanation here) tracks how much the telco earned in hard cash for that year minus off the capital expenditure spent on investments and existing asset touch up
I find that for dividend stocks, FCF is a much better figure to use than net income because we get the dividends paid out from cash flow.
This is effectively the nutrients that gives life to a company. In the absence of this, a company has to take nutrients from other sources (debts and cash holdings) thereby depleting the company.
By virtue of being the larger telecom, Singtel have much higher free cash flow. It is important to see that for the past 6 years, all 3 telcoms are earning positive free cash flow.
However, Singtel is generating much better than the other 2. M1 in particular have been decling so much so that they are reaching negative free cash flow territory
The current Free Cash Flow yields for the 3 telcos are:
- Starhub: 8.22%
- M1: 3.18%
- Singtel: 6.5%
Free Cash Flow Margin
Most investors are more familiar with profit margin or gross margin. How about free cash flow margin.
This is essentially free cash flow / revenue. In other words, it measures $1 of revenue generates how much free cash flow.
Singtel have been a winner here by virtue of being able to maintain the highest FCF margin. $1 earns them $0.19 in FCF. Starhub have been doing well to stay close to Singtel by generating 17.7% in FCF margin.
M1 on the other hand shows massive decline in FCF margins. This makes them the most troubling telco here.
But essentially, competition have resulted in all 3 telcos earning lesser and lesser.
Dividend payout of Free Cash Flow
We usually calculate dividend payout using dividend paid / net income.
Here we vary this to calculate out of $1 of FCF how much dividend is paid out.
The lower the payout the better. Payout greater than 100% is a warning indicator.
Starhub and Singtel have been very prudent here. Singtel especially have a history of low payout they are maintaining it at 60%.
Starhub have always been the darling for high yields but their payout have been climbing to 82%.It is still safe but perhaps its been capped pretty much at the top compared to Singtel.
M1 on the other hand have consistently paid out more than FCF. Probably the least prudent.
I believe based on this data, Starhub is the dividend cash king here by virtue of higher payout yet still having a good cash flow discipline.
M1 in their latest quarter have rebounded and have much better FCF figures.
I still feel Singtel is a competent dividend play because they will be able to defend and build their free cash flow much better than the other 2 by virtue of its size.
If we compare 80% FCF payout ratio, Singtel vs Starhub’s Div yield will be 6.2% vs 6.9% which is not far off. Starhub’s prospect is much more capped compared to Singtel.
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