Earlier in May this year, Singapore Airlines (SIA) reported a set of healthy 2024 financial results. Its strong momentum continued, despite the bad news – tariffs, geopolitical conflicts, oil price fluctuations.
Over the past year, SIA shares have gone nowhere. Over the past month, shares were down 13%.
At current prices, it’s now trading at ~6% dividend yield.
Is it a good time to buy SIA shares now? Let’s unpack this.
Why do SIA shares keep falling?
At first glance, SIA 1QFY25/26 results look good. Its revenues grew 1.5% higher y/y to S$4.8 billion. Both Singapore Airlines and Scoot brands hit record passenger numbers, driven by continued demand for air travel.
In fact, SIA and Scoot carried a record ~10 million passengers during the quarter which was ~7% higher y/y.
What’s more, management said it remained in a strong fundamental position. That’s the good news. But if you dived deeper, you’d noticed this.
Net profits fell ~59% to S$186 million.
That’s the big problem: look, there’s no doubt Singapore Airlines carries prestige. But higher inflation is putting SIA in a tough spot. You see, despite falling oil prices and lower fuel costs, SIA’s operating costs continue to go up.
This means, as SIA keeps making more revenues, it needs to increase its input costs to meet growing customer demands.
In other words, rising revenues but costs rising faster.
It also doesn’t help that SIA’s 25% stake in Air India was still a loss-maker, which saw a widened y/y net loss of ~S$1.6 billion.
Despite its recent bad 1QFY25/26 results, SIA after all still had a strong 2024 result. So… seems like it’s just a temporary setback. Well, let’s use part information in a sensible way to find out.
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Would I buy SIA shares for “growth”?
Right now, I believe the market consensus is that SIA shares could eventually revert to its former glory of S$11 per share – closing this “price gap”.
Now, here’s the thing: Never, ever base your investment decision thinking a stock would go back up to its former peak. That’s dangerous.
I’ll explain.
In 2015, SIA revenues ranged between S$15-16 billion, averaging around S$300-S$1.3 billion in net profits. Today, it has hit much higher revenues, net profits have more than doubled from ten years ago.
All good – but I’m not convinced.
First, you need to know that whether the market goes up or down, if you’ve bought a good business that’s able to consistently generate free cash flow, you’ve nothing to worry about.
Free cash flow determines exactly how much a company generates cash from its operations, after deducting capital spending to reinvest and grow its business. You want companies that generate positive free cash flow year after year.
Why?
Strong, positive free cash flow ultimately drives growing share prices. Especially for dividend investors.
However, a closer look at SIA’s over the last 15 years free cash flow tells me a different story. Despite its steady revenues and good net profits, SIA’s free cash flow is highly cyclical – some years are positive. Some years are negative.
In fact, its positive free cash flow tends to fall after it peaked. And its negative free cash flow is like burning more of its home furniture just to keep the furnace running.
This is tricky especially if you prize stability in a stock.
Would I buy SIA shares for dividends?
It depends. If you’re a two year, three year or a 12 year investor. Over the past 15 years, SIA has paid an average dividend of S$0.31/share per year. At current prices, this is close to ~5% dividend yield.
If you ignore how share price would actually trade, it seems its dividend yield is good. If you’re comfortable with this yield, nothing to worry about.
Now, history tells me SIA’s dividends are cyclical. In strong years, you might see payouts above its average. In down years, it’s below average. But it’s tough to expect consistently growing dividends in the long-term.
That’s why I say: it depends on your time horizon. At today’s 6% dividend yield, SIA shares seem reasonable for now.
Having said that, no matter how a company’s shares trade up or down, what’s crucial is the underlying business operations. A good business will produce good profits and good dividends in the long run.
Otherwise, you’re taking risk of a speculative market.
My final thoughts
I recognize SIA is a different kind of blue-chip for dividends. It’s one of Singapore’s most iconic brands, yet it’s stuck in a cyclical industry, where it faces ferocious competition from other airlines.
The thing is, even with shares currently going nowhere, the stock isn’t exactly cheap given its cyclical profits and volatile free cash flow.
On the other hand, the economics of this business has allowed it to pay somewhat a reasonable dividend yield over the past 15 years, on average.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
