What Does Singapore Telecommunications Limited’s Balance Sheet Tell Investors About Its Dividend?
Singapore Telecommunications Limited (SGX: Z74) is a huge company in many ways. It is the largest telecommunications company in Singapore; it is the largest primary-listing in Singapore’s stock market; and it has 640 million mobile customers.
One trait about Singtel that may appeal to income investors is its long track record of paying an annual dividend. It’s a record that is easily over 10 years long. But that is then and this now. Can Singtel sustain its dividend in the future?
Unfortunately, there is no easy answer.
That said, there are some things about a company’s business we can look at for clues. Here are three of them, keeping in mind that they are not the only important aspects: (1) the company’s profit history, (2) a comparison of the company’s free cash flow and dividend, and (3) the company’s balance sheet strength.
Balance sheet strength
Dividends are paid out to investors in the form of cash.
In other words, a company must have enough cash in hand or at least have the ability to borrow money (if necessary) to pay its dividend. Generally speaking, a company with a strong balance sheet has the resources needed to help fund its dividend. (It should also be noted that borrowing money to pay a dividend is not ideal.)
To gauge the strength of a company’s balance sheet, there are two things we can look at, amongst many others: A company’s current cash balance; and the company’s debt to shareholders’ equity ratio. In general, we are looking out for a high cash balance sheet and a low debt to shareholders’ equity ratio.
Singtel currently has (based on latest financials as of 31 December 2016) a cash balance of S$847.8 million. It also has total debt of S$11.27 billion and shareholders’ equity of S$26.95 billion. This gives rise to a debt to shareholders’ equity ratio of 41.8%. Although the telco’s cash balance is not high for a company of its scale, its debt to shareholders’ equity ratio is reasonably low, which suggests that the company has room to borrow further if necessary.
A Foolish conclusion
Earlier in this article, I had shared three things about a company’s business investors could like at to give them clues on how sustainable the company’s dividend is. The third is something we have just studied for Singtel. As for the first and second, it turns out that:
1) Singtel’s revenue and profit have been declining over its last five fiscal years.
2) The company has been paying a dividend that’s largely within its means, although its declining free cash flow is a source of worry.
In sum, Singtel appears to have a high probability of being able to sustain its dividend given its decent balance sheet and its ability to generate free cash flow that’s higher than its dividends.
But with everything being said, do also bear in mind that there are other important aspects about the stock to investigate, as I had mentioned earlier, when it comes to assessing the sustainability of its dividend.