Singtel Has Dropped More Than 30%… Is It A Buy At 5.9% Yield?

Financial Horse had an interesting post on Singtel entitled SingTel at S$2.96 – 3 quick thoughts on why I’m still not a buyer.

Q3 hedge fund letters, conference, scoops etc

Here are my own initial thoughts looking at it.

Why buy telcos – dividends of course!

Most people who buy telcos normally are attracted by the defensive nature of the business and the dividends.

Dividend yield at current prices almost top +6% and prices have dropped below $3 for the first time in a long time piquing my interest.

Readers who read the last post arguing why dividend yield is the one of the worst metrics to use will remember that the yield is not as important as the sustainiability of the yield going forward.

Here’s a short dividend history before we dig deeper.

It’s important to note that the 2018 payout was boosted by the one time IPO of Netlink trust and that going forward, will probably not be replicated.

Is the dividend sustainable?

The only way to know if the dividends are sustainable are to see if free cash flow generation is able to meet the dividend payouts.

Singtel is quite a different beast from M1 & Singtel because of its overseas joint ventures, and receives significant dividend income from these joint ventures.

Telkomsei (Indonesia) is a big workhorse for Singtel – contributing more than a billion dollars of dividends straight into Singtel’s free cash flow. Any decline in the Rupiah is bound to have an effect on dividends paid of course.

Airtel doesn’t contribute much by way of dividends yet. For those who follow the India Telcom space (which is probably virtually zero) – there is an intense titanic battle there now among the sector.

In short, it make the upcoming competition from the introduction of the forth telco looks like child’s play. You can read more about it here.

Goldman Expects Billionaire Sunil Mittal To Come Out On Top Of The Telecom War

Given what’s playing out, I doubt you’re going to see much dividends coming out in the near future. In fact, Singtel had upped its stake just earlier this year in February.

* Special dividends in 2018 were excluded because they were funded from the proceeds of Netlink IPO

Still, looking at the overall picture, Singtel’s cash flow generation looks pretty solid as of now and I think there is a reasonable margin of safety in paying out a dividend.

Is there room for the dividend grow?

Another part of the equation is whether there is room for dividends to grow going forward.

Competition in Singapore is intense now – but the competition overseas can be just as vicious [India specifically].

I don’t have any real insight into what’s happening overseas specifically. For example, India is a huge market, but competition there now is far more vicious than in Singapore although this could change in the future once the dust settles.

You are going to have trust management on this one and hope that Airtel turns out to be another Telkmosel down the road.

So.. is Singtel worth buying?

Bull Case:

Prices appreciate to the 5 year average dividend yield (4.65%) which reflects a price of $3.765 and 6% dividend yield yield going forward

Return per annum (assuming 5 year holding period): about +11%

Base Case:

Zero price appreciation and dividend remains the same.

Return per annum: +6%

Bear Case:

Dividend declines + prices continue to drop

Return: Negative

The base case scenario in all fairness seems pretty decent to be honest with what I think is a sustainable dividend yield of 6% as of now.

There’s some price appreciation if prices go up to reflect more normalized dividend yields and if dividends start to rise again as overseas operations recover.

Bear case reflects the situation that competition in Singapore heats up dramatically affecting its core cash flows locally thereby affecting its dividend yield.

As of now, the consensus is that the competition will not affect Singtel dramatically but requires monitoring as the fourth telco takes root.

Disclosure: The author does not own Singtel stock at the time of publication. This is not a buy or sell recommendation but merely the written opinion of the author meant for educational purposes.

Article by Jun Hao, The Asia Report