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Why StarHub’s Dividends Are in Danger

Chong Ser Jing

At the moment, StarHub Ltd’s (SGX: CC3) dividend yield looks really attractive on the surface. A share price of S$1.28 and a trailing dividend of S$0.125 per share gives a yield of 9.8%. For context, the SPDR STI ETF (SGX: ES3), an exchange-traded fund that tracks the business fundamentals of the Straits Times Index (SGX: ^STI), has a dividend yield of 3.8% right now.

But I think investors who are attracted to StarHub’s high dividend yield need to tread carefully. I see three reasons why StarHub’s future dividends are in danger of falling. 

Business background

StarHub is likely to be familiar to many of us in Singapore as it is one of the major telcos in our sunny island. In the first half of 2019, StarHub pulled in revenue of S$1.15 billion (all of it from Singapore), of which 33.5% came from providing mobile services.

Other revenue segments at StarHub include enterprise services (23.9% of revenue in the first half of 2019), telecommunication and mobile equipment sales (22.9%), pay TV services (11.8%), and broadband services (8.0%). 

Reason 1: History of falling earnings and free cash flow

The table below shows StarHub’s earnings per share (EPS), free cash flow per share, and dividend per share from 2013 to 2018.


Source: S&P Global Market Intelligence

StarHub’s EPS and free cash flow per share have both declined significantly over the past few years, to the extent that both financial numbers in 2017 and 2018 were much lower than the dividend of S$0.16 per share for both years. This is unsustainable.

Indeed, StarHub’s intention is to pay a quarterly dividend of S$0.0225 per share for 2019, which equates to an annual dividend of S$0.09 per share; the telco has already paid a dividend of S$0.045 per share for the first half of the year. StarHub’s EPS for the period was S$0.052, down 25.7% from a year ago; free cash flow per share did not fare any better, falling by around 30% to S$0.044. If we assume the same rates of decline for StarHub’s EPS and free cash flow per share for the whole of 2019, we end up with S$0.083 in EPS and S$0.059 in free cash flow per share. Both are lower than the projected dividend of S$0.09 per share for the year.

StarHub’s current policy for 2020 and beyond is to pay a dividend that’s at least 80% of net profit attributable to shareholders. If the company’s profit and/or free cash flow falls in the future (keep in mind that the track record over the past decade has been bad), the telco’s dividend can’t increase too.

Reason 2: Lack of revenue growth

If StarHub had managed to grow its revenue in the past few years, then the trend of falling EPS and free cash flow per share would be less worrisome. This is because the company could have been investing in its own business to produce even larger streams of profits and cash flows in the future. Unfortunately, StarHub’s revenue has stagnated.


Source: S&P Global Market Intelligence

The flat revenue but falling EPS and free cash flow per share suggest that StarHub’s businesses are facing severe competitive pressures. 

Reason 3: Severely weakened balance sheet

A strong balance sheet adds a layer of protection to a company’s dividend. Unfortunately, StarHub’s balance sheet has grown much weaker over time.


Source:  S&P Global Market Intelligence

From 2013 to 2018, StarHub’s net debt doubled from S$425.7 million to S$862.5 million. All other things being equal, having more debt on the balance sheet equates to higher interest expenses, which means less cash leftover for paying a dividend. StarHub’s situation is made worse by the fact that its earnings and free cash flow both declined sharply in the past few years while its debt grew.

The Foolish bottom line

It’s easy to be tempted by a stock’s high dividend yield. But it’s important to look beneath the hood at a company’s financials – regardless of how high its dividend yield is – to determine whether its dividend is likelier to decline or grow over time. In StarHub’s case, its financials suggest that its dividend is at high risk of falling in the future. 

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.

Motley Fool Singapore 2019