This Singapore dividend stock is Singapore’s second largest telco operator.
It’s one of the dominant blue-chips of the last generation.
Remember cable TV?
Starhub (SGX:CC3) was a leader in the cable TV business. Starhub calls it Pay TV.
And for many years, Starhub dominated this segment.
Starhub even worked with Netflix to offer content for Starhub’s Fibre TV.
Launched in April 2015, Fibre TV provided better TV quality and even had personalized features.
This Singapore dividend stock offered an explosion of new content
At one point, Starhub brought in more than 200 channels on their platform.
These channels include the UEFA EURO 2012, FOX SPORTS, Grand Slam tennis.
There’s also TV Anywhere, that could access 36 channels on the PC, Macs, iPads and tablets.
Starhub’s Pay TV offered a buffet of entertainment — kids, comedy, drama, news and sports.
In fact, this Singapore dividend payer served over 500,000 households with their Pay TV service.
It was a widely respected business.
And you know what’s even better?
Starhub rewarded shareholders with their generous dividends.
Just like many of these high quality Singapore REITs.
Starhub’s dividends grew from 9 cents per share in 2005, to paying out steady dividends of 20 cents per share every year since 2010.
Starhub was every Singapore dividend investor’s dream
Today, its stock looks attractive.
Shares are down 71% since 2014. It spots a dividend yield of 4%.
It looks like a “no-risk” price to me — a massive discount on a Singapore dividend stock.
Source: Yahoo! Finance
But I know Starhub.
And I know the industry is competitive — more and more players entering the telco market.
It’s a bloodbath.
You’ll agree with me this. In a very tiny market like Singapore, how is Starhub going to grow its revenues?
But the thing is, the story isn’t nearly that simple as the question.
Here’s the problem many people do not know
Starhub, for many years, was financing their dividends with debt.
Now, I’m skeptical of companies that pay dividends financed with debt.
Companies do this because they don’t wish to alarm the passengers in the titanic that’s about to hit the iceberg.
Until the ship sinks.
And the truth is, at some point, dividends will get cut.
In Starhub case, it took a while before the company decided to slash dividends.
You see, Starhub was generating a steady free cash flow every year.
But the dividends it paid out was more than what it was earning.
That’s why Starhub had to consistently raise new debt.
Why would Starhub pay more dividends than it earned?
Because they don’t want to see their share price fall.
They prefer to please the stock market. To make sure their stock continued to fly.
When a company decides to cut dividends, investors get spooked — they think company is in trouble.
As a result, investors sell the shares. The stock falls.
And the signs were clear.
In 2015, Starhub generated a healthy free cash flow of S$216 million.
Free cash flow is operation cash flow minus the additional capital that’s needed to maintain the business.
Yet, the company was paying out S$345 million of dividends.
That’s more than what Starhub was making.
It was simply unsustainable.
Starhub was forced to borrow more money in order to keep their shareholders happy.
In 2017, Starhub raised S$200 million of perpetual bonds.
Imagine this.
Your friend borrows $1,000 from you. Then tells you he can choose not to pay you back forever.
That’s a perpetual bond.
And going back to what’s happening to Starhub right now?
Many on-demand streaming services — Netflix, Disney+, Apple TV — have gathered on the horizon.
Like vultures, all waiting to steal their share of this S$2 billion telco.
They are all standing over the same corpse — Starhub.
In its latest first quarter 2021 results, Starhub’s revenues continue to fall 3.8%, to S$487 million.
Its net profits dropped 24% to S$30 million.
Starhub’s free cash flow shrunk.
What I think is happening to Starhub investors right now
This is something that took me a long time and a lot of money to figure out.
That when you’re trying to safely pick “no-risk” stocks, you’ve got to avoid stocks that are cheap not only because of industry-wide problems.
But, more importantly, the way they manage their finances.
Starhub is right smack in the middle of a disruptive industry.
Even at a 71% discount from its share price peak, this Singapore dividend stock doesn’t look as cheap as it’s supposed to be.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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