What Does Singapore Telecommunications Limited’s Profit 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.
A company’s profits are an important source of its dividends. And as we know, profit is what is left when we deduct a company’s costs from its revenue. So, ideally a company should have:
1) A track record of steady revenue growth
2) A track record of growing profits and a stable or rising profit margin
The following’s a table showing Singtel’s revenue, net profit, and net profit margin from its FY2012 (fiscal year ended 31 March 2012) to FY2016:
Source: Singtel’s financial statements
There are a few observations we can draw from the data. Firstly, Singtel has seen its revenue and net profit margin decline over the timeframe under study. The only saving grace here is that its net profit margin has been reasonably stable at around 20%.
The company’s revenue and profit performance is mainly driven by the weakening of the Australian dollar. Singtel has sizeable operations in Australia through its full ownership of Optus, Australia’s number two telco.
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 first is something we have just studied for Singtel. As for the second and third, it turns out that:
1) Singtel has been paying a dividend that’s largely within its means, although its declining free cash flow is a source of worry.
2) The company’s balance sheet is reasonably strong with room to borrow further if necessary.
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.