One of my Diligence Wealth Club members asked me recently: if I’d buy Starhub at 6.2% yield today?
I thought this was a great question. On the surface, Starhub’s high dividend yield looks attractive. This also reminded me of how I should look at a dividend stock as an income investor.
So let’s dive in.
At S$1.7 billion market cap, Starhub remains one of the largest telco players in Singapore.
While the major telco operator sells mobile subscriptions, a large portion of its business focuses on Broadband and Entertainment – which includes its digital TV services.
For many years, Starhub built a strong base in its Broadband and its pay TV services. Both segments help produce steady recurring revenues.
As a result, Starhub has been producing positive free cash flow year after year.
In case you missed my recent posts: |
Are Starhub’s dividends secured?
However, years ago, when I looked at Starhub more closely, two things struck me.
First, while the company was producing free cash flow, it paid out more in dividends than it was collecting free cash flow.
This means it somehow had to fill the financing gap. Naturally, this came from debt. In 2016, Starhub raised S$300 million in bonds. Then in 2017, it raised S$199 million in perpetual capital securities.
I can’t say with certainty these debt funding were used to directly pay dividends. But when a company consistently raised more debt than it should while maintaining dividends, I was concerned with the company’s capital allocation.
Dividends have a “Shareholders’ Effect”
The thing is, dividends have a powerful psychological effect on investors.
When a company pays steady dividends, it creates a sticky shareholder base. This is what I call a “Shareholders’ Effect”. This means shareholders who own dividend stocks are less likely to sell their shares and hurt stock prices.
The big problem comes when dividends get cut, it loses this shareholders’ effect quickly.
While Starhub wanted to maintain its shareholders’ effect through consistent dividend payout, the reality is at some point, it had to cut dividends.
That put massive pressure on the stock price. Over the last five years, Starhub shares were down 20%.
In other words…
Are Starhub’s dividends truly sustainable?
Here’s the other thing. The telco business is a capital intensive business. Companies must constantly invest in network infrastructure and bid for spectrum licenses like 5G.
You see, spectrum auctions used to be very expensive in the 1990s. That has since dropped over the years. This has forced Starhub to be a price taker.
Think about it: what’s stopping you from switching to another cheaper telco today, since switching to another telco plan is so much easier today?
Over time, intense telco competition has forced telco operators like Starhub to lower their data plan prices. Data gets cheaper over time.
Normally, the government controls the number of telco licenses in the country. This way, you know how many players there are in the industry.
And you can predict how much data plan you sell, how much you charge to customers and how many plans you can sell. Then factor in costs, including licensing fees.
What’s more, Singapore has a much smaller population in the island city. This is much different than the US, China and Japan where populations are much higher.
Unlike telcos in other countries, local telco players in Singapore have to fight it out with many players for a ridiculously small market.
During its latest financial results, Starhub’s revenues and net profits fell.
This was a result of lower contributions from its Mobile, broadband and Entertainment segments. What’s more, operating costs are maintained because outfits have high fixed costs.
The Power of Dividend Growth
Put it this way, high dividend yield must be accompanied by high quality businesses with a durable competitive advantage.
When I look at dividend stocks as a Singapore investor, I often compare businesses that pay dividends that are well secured by a consistent free cash flow.
For example, what’s different is dividend growers like Sheng Siong produce free cash flow and pay dividends within its reasonable range.
Since 2012, Sheng Siong’s shares have continued to climb.
Despite market cycles, this supermarket giant continues to grow its dividends and earnings year after year. In fact, it’s now earning close to S$150 million in a single year.
If you owned Sheng Siong since 2014 at S$0.60, you could see its dividends grow over the years.
And the company is able to gush free cash flow consistently…
So… would I buy Starhub at 6.1% dividend yield today?
Starhub has continued to pay dividends year after year. Since 2020, after its hefty dividend cut, dividends have grown over time.
However, given the intense competition, it’s hard to say whether a high dividend yield is still secured by free cash flow. It’s even harder to beat inflation if a company’s dividends are affected by intense competition.
My final thoughts
For dividend investors, the key lesson I take away from Starhub was this: a high dividend yield may look attractive. However, what matters more is the business strength that could sustain a dividend payout.
Over the long run, the best dividend investments may not necessarily have the highest dividend yield. Instead, these companies can continue to grow dividends year after year with predictable profits.
With dividend growth, you can beat inflation and achieve high stock market returns for retirement.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
