Can Singtel Raise its Dividends in 2023?

Things are finally looking up for Singtel (SGX: Z74).

For the past two years, Singapore’s largest telco had to contend with a variety of headwinds such as a lower roaming revenue, depressed demand for its mobile services, and lower average revenue per user (ARPU).

But with borders reopening and air travel restarting, the blue-chip telco is finally seeing some semblance of normalcy.

Its recent fiscal 2023’s first half (1H2023) earnings saw a slight 2% year on year improvement in core underlying net profit to S$1 billion.

Both its Singapore consumer and Australian unit, Optus, also posted small year on year revenue increases.

With the economic recovery gathering steam, can the telco raise its final dividend next year?

A dividend turnaround?

The telco has been a steady payer of dividends over the years and is recognised as one of the stalwarts for yield-hungry investors.

Unfortunately, dividends have been on a steady downtrend since fiscal 2019 (FY2019).

Singtel was paying out a total dividend of S$0.175 per year from FY2015 through FY2019.

The group even paid out a special dividend of S$0.03 in FY2018.

However, total dividends declined to S$0.1225 for FY2020 and then S$0.075 in FY2021 as Singtel grappled with the effects of the pandemic.

The good news is that there appears to be a turnaround in FY2022, with the total dividend rising to S$0.093.

For 1H2023, the interim dividend has been raised to S$0.046, slightly higher than the S$0.045 paid out in 1H2022.

Based on this pattern, investors could be seeing a better final dividend as economic conditions improve.

Consistent free cash flow generation

To its credit, Singtel has been a free cash flow machine.

For each of the last five fiscal years, the telco has generated a free cash flow of S$3 billion and above.

Net profit may be affected by one-off exceptional items such as the additional licence fee for Bharti Airtel or provisions made for Optus’ recent data breach, but Singtel’s cash flow remained steady all the way.

This consistency has allowed the group to continue doling out dividends and barring a significant investment in new spectrum or infrastructure relating to its network expansion, Singtel should continue to generate copious amounts of free cash flow.

For 1H2023, Singtel has continued to churn out a free cash flow of S$1.5 billion.

Higher mobile revenue

The Singapore Consumer division has recorded a 13% year on year increase in operating profit to S$173 million for 1H2023.

The better performance was led by a recovery in roaming revenue which reached  60% of pre-pandemic levels as of 30 September 2022.

There could be more upside as China is slowly easing its tough COVID-zero restrictions which may allow more Chinese tourists to travel in the coming months.

As China is a major tourism generator for Singapore, the influx of Chinese tourists will boost roaming revenue.

Meanwhile, Optus is also witnessing a sharp 51% year on year surge in operating profit to A$164 million with growth in mobile and fixed-line revenue.

The continued growth in mobile services, along with investment in 5G networks, should bode well for Singtel’s Australian subsidiary.

Further capital recycling

Singtel has also been busy recycling capital to go asset-light.

The group has already made several moves to divest assets after it announced a strategic review in May last year to “right-size” the business.

CEO Yuen Kuan Moon acknowledged, at the time, that there was a need to sell off businesses that were underperforming and reallocate capital to growth areas that showed potential.

Singtel then proceeded to sell a chunk of its Australian tower assets for A$1.9 billion last October.

It also pared down its stake in Bharti Airtel to raise S$2.5 billion and sold away Optus’ insurance business for A$200 million.

There was also a proposal to list Optus earlier in June this year but the plan has not panned out.

Meanwhile, Singtel has also carried out a review and divestment of its US digital assets, raising US$239 million from the sale of Amobee.

The telco is also readying its US cybersecurity business, Trustwave, for a potential sale that may raise between US$200 million to US$300 million.

These moves have enabled Singtel to pare down its stakes in multiple assets and investments, generating additional cash that could be used to fund future dividends.

Get Smart: Alive and kicking

Singtel is seeing green shoots sprouting in many of the markets that it operates.

The telco’s ability to generate free cash flow and its capital recycling moves should stand it in good stead to raise its final dividend for FY2023.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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