Singtel – an unloved dividend stock is now the Christmas tree dragged out from the dark store, to be lighted in the living room.
At one point, Singtel shares were stuck in the bargain bin. But have since jumped 31% over the last 6 months. Based on current share price, dividends now trade at around 4.7% yield.
What’s driving Singtel’s shares?
Can its dividends go back to its peak of 6% dividend yield?
(Singtel briefly traded at more than 7% yield during COVID-19, but that was a one-off)
Credit: tikr.com, Singtel’s dividend yield history
What’s driving Singtel’s 31% share jump?
In 2021, Singtel launched a “strategic reset”. It improved operations: recycled $8 billion of assets, including selling off part of its stakes in Indara (formerly Australia Tower Network), Airtel and Nxera.
Earlier this year, it announced to form a joint venture to develop data centres in Malaysia, Johor. And investments into STT GDC.
Singtel also sold off smaller, not-so-profitable businesses like Amobee and Trustwave.
And ploughed capital back into the business.
Last year, Singtel paid total dividends of S$0.15 per share. Since 2021, it has paid more than $6 billion dividends.
In a way, Singtel maximised returns for its shareholders.
Credit: Singtel’s Full Year March 2024 Presentation Slides
Singtel’s business and dividends have improved
Today, Singtel is a leaner, meaner, asset-light machine. It has a higher interest rate cover of 19x, 88% of its total debt is fixed interest rate and now holds $2.7 billion of cash.
Over the last 12 months, this telco giant generated S$2.6 billion of free cash flow. So far, so good.
Management has also said it’s on track to sell off more assets – that could pay an additional dividend of S$0.03 to S$0.06 per share, each year for the next 5 years.
This is on top of the potential S$0.089 ordinary dividends in the coming financial year 2025.
That puts a dividend yield close to 5%. And a rough dividend payout of 70-90% from its net profit. I like this.
Credit: Singtel’s Half Year Sept 2024 Presentation Slides
Where’s Singtel’s growth coming from
Now, Singtel is Singapore’s largest telco player. It has 4 core businesses: Optus, Singtel Singapore, NCS and Digital InfraCo.
Credit: Singtel’s Half Year Sept 2024 Presentation Slides
Today, Singtel produces half of its net profits from overseas. Last year, its joint ventures and associates – Airtel, Telkomsel, AIS and Globe — made S$1.8 billion of profits, which contributed more than half of Singtel’s net profits.
Credit: Singtel Annual Report 2023
A closer look tells me Telkomsel, AIS and Globe have much healthier profit margins. That’s the good news.
Credit: Singtel’s Financial Statements
Can Singtel grow to 6% dividend yield?
At its peak in 2017, Singtel was producing around S$17 billion revenues and close to S$4 billion in net profits. And most of Singtel’s cash flow came from Optus and Singtel Singapore – both segments are monster businesses. Its telco businesses could afford to maintain its high dividend payout ratio.
But the more I think about this, the more I find it tough to believe Singtel can be put as the once well-established blue-chip that grows dividends.
The telco sector is an intense sector. Singtel’s overseas telcos are capturing new customers who have yet to have a data plan subscription.
However over the last 5 years, free cash flow has continued to slide from S$3.8 billion to S$2.6 billion. At one point, it paid heavily for 5G capex.
Singtel could pay steady, sustainable dividends.
But this makes it challenging to sustainably grow its dividends.
My Final Thoughts
I like Singtel’s strategic reset. I like how management is rearranging Singtel’s business model. What’s also interesting is it’s focused on what’s important: telco + data centres.
As a long-term dividend investor, the extra dividends from selling assets is a big bonus.
But here’s the thing, it’s tricky too. I mean, it’s hard to convince myself the last few puffs from asset sales could sustainably drive a company’s growing dividend strategy. That must come from a deep, economic moat with a resilient business model, which keeps competitors at bay.
At current dividend yield of close to 5% looks a good catch. But it might be tough to expect a much higher yield at current prices.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
