What Does M1 Ltd’s Balance Sheet Tell Investors About Its Dividend?
M1 Ltd (SGX: B2F) is the smallest operational telco in Singapore.
The company has a long record of paying an annual dividend that stretches back to at least a decade. But this raises a crucial question: Is M1’s dividend sustainable? The question gains even more importance when we consider the fact that the telco’s dividend in 2016 had declined by 16% compared to 2015.
Unfortunately, there is no easy answer to the question. But, 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.
M1 currently has (latest financials as of 31 March 2017) a cash balance of S$7.5 million. It also has total debt of S$383.7 million and shareholders’ equity of S$438.8 million, which give rise to a debt to shareholders’ equity ratio of 87%.
With the numbers we’ve just seen, M1 fails to tick the right boxes here – it has a very low cash balance and a high debt to shareholders’ equity ratio. In other words, the telco has a weak balance sheet. But, an argument can be made that M1’s balance sheet still has room to take on more borrowings since it’s not unusual for a telco to have high leverage.
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 M1. As for the first and second, it turns out that:
1) M1’s profit margin and net profit have remained stable from 2012 to 2016. Although, there was a sharp dip in profit in 2016 when compared to 2015.
2) The company has been paying more in dividends than it has generated in free cash flow over its last five fiscal years.
In sum, M1 is a telco with insufficient free cash flow to support its dividend, and a weak balance sheet. So, the probability that M1 can sustain its current dividend in the future looks low.