Singtel vs Starhub vs M1: Which One Would Passive Income Investors Pick?

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Are you looking to invest in dividend stocks that pay high and stable dividend income? You want to invest in stocks with strong fundamental, proven business models, great dividends track record and ideally, you are also the customers of their products/services: Telco plans. Today, the three Telcos I’m going to cover achieve exactly that. But first…

A Little History on Singapore’s Telecommunications Industry

When it comes to the telecommunications industry, everyone knows that Singtel was Singapore’s first and largest listed telecommunication company.

But do you know that Singtel was ‘branched out’ as a private company from Telecoms – a government statutory board on 1 April 1992?

Singtel’s initial public offering (IPO) was launched on 12 October 1993. It was a huge monumental event for Singapore as 1.4 million Singapore citizens became direct shareholders of a local utilites company for the very first time.

Sourced from The Straits Times

According to Singtel, Singapore Citizens were able to purchase the shares at a discounted price as part of the Singapore Government’s effort to share the nation’s wealth and to enlarge the base of share-owning Singaporeans.

To date, my dad still owns the few lots of Singtel shares and treats the shareholdings as being a part of Singapore’s history.

Soon after, M1 entered Singapore’s mobile telecommunications scene in 1997 and penetrated the previous monopoly owned by Singtel (Yes, it wasn’t Starhub that came in 2nd!).

In fact, Starhub came into the picture later by officially launching in April 2000 with ST Telemedia, Singapore Power, BT Group and Nippon Telegraph and Telephone (NTT) as its major shareholders.

Where Is The Telco Industry At Now? 

According to Internet World Stats, Singapore has an internet penetration rate of 83.6%, a relatively high figure compared to the whole world’s 54.4% rate.

But this shouldn’t come as a surprise given that our telecommunication infrastructure spans across the entire densely populated city of Singapore. Even our Mass Rapid Transit (MRT) is connected to the grid so that people can ‘maximize’ their time usage to surf Facebook/Instagram or do some online shopping on the go.

While the 3 big Telcos have co-existed for a long time by offering similar SMS (short messaging services), Calls and 3G bundles, the times have changed rapidly. They have been ‘forced’ to evolve and develop various new growth strategies or be ‘left behind.’

With that in mind, let’s do a quick recap of their business segments below.

  1. SingTel

Biggest among the 3 Telcos, Singapore Telecommunications Limited (SGX:Z74) – Singtel is one of the largest telecommunication companies in Asia with operations mainly in Singapore and Australia. It operates in 3 major divisions: Group Consumer, Group Enterprise and Group Digital Life.

  • The Group Consumer segment refers to its mobile, mio TV, fibre broadband, ADSL and fixed voice services and also their investments in regional mobile associates such as Telkomsel, Airtel, AIS and Globe.
  • The Group Enterprise segment provides infocomm technology (ICT) solutions for corporate clients across Singapore, Australia, the United States etc.
  • Lastly, the smallest but fastest growing Group Digital Life segment aims at creating new scalable engines of growth. Their core businesses include Amobee – focused on digital marketing, HOOQ – subscription video service and DataSpark – Data analytics firm. You can find out more about them here.
  1. StarHub

Next up, I have StarHub Limited (SGX: CC3). Its business is split into 2 main buckets – Consumer and Enterprise. The Consumer business covers the Mobile, Pay TV and Broadband services whereas the Enterprise business targets at Telco and Digital services, ICT Solutions and Wholesale services.  

Starhub has been working hard on the ICT Solutions segment through the acquisition of D’Crypt Pte Ltd (D’Crypt) which improves its capabilities in cryptographic and digital security.

In fact, Starhub is delivering results on the cyber-security front as it announces a partnership with Temasek to set up Ensign InfoSecurity. It is a pure-play cyber-security firm which will offer bespoke, end-to-end security solutions to enterprises and governments globally.

  1. M1

Last but not least, M1 is the smallest among the 3 Telcos. Its revenues are driven across 4 key segments – Handset sales, Fixed services, Int’l call services and Mobile services.

Most recently, M1 received a buy-out offer from Keppel Corp and Singapore Press Holdings (SPH). They will make a pre-conditional voluntary general offer of $2.06 per share for all M1 shares they do not own.

However, Malaysia’s Axiata Group Bhd, the largest shareholder in M1 with a 28.3% stake may not agree to the offer as it feels that it’s inadequate.  I will keep it as part of the analysis later given that M1 is still trading on the market at the time of writing and a possible bidding war.

A Comprehensive Comparison of the Telcos

With the introductions out of the way, let’s dive in and compare the 3 Telco stocks using some popular metrics.

I feel that many investors lean towards Telco Stocks for 2 main reasons:

  1. Everyone who uses even a house telephone will hear of them. Thus, investors are more comfortable investing in these familiar household names.
  2. They offer stability in earnings and dividends. Despite being affected by the ongoing price wars for the data plans, they are still profitable year after year. And given that most of the capital expenditure was accounted for at the start, they are able to return back a huge chunk of the profits as dividends (Rejoice, dividend investors!)

As such, I will assess the dividend sustainability of these 3 big Telco stocks based on their earnings and free cash flow numbers.

Do note that the figures I used in this analysis were reported at different time periods. I referred to the FY18 figures for Singtel and FY17 figures for Starhub and M1 and FY16 figures for Dairy Farm and NTUC Fairprice.

Which Telco is the Most Profitable?

 Singtel (SGX:Z74)Starhub (SGX:CC3)M1 (SGX:B2F)
Total RevenueS$17,532mS$2,401 MS$828 M
EBITDAS$5,089mS$614 MS$302 M
EBITDA Margin29.0%27.9%36.5%

The chart answers the question on how much profits each Telco makes out of every $1 in revenue. EBITDA here refers to earnings before interest, tax, depreciation and amortization. EBITDA allows investors to focus specifically on operational performance as it eliminates the effects of financing and accounting decisions.

M1 came out tops with a 36.5% EBITDA Margin and Singtel ranked second at 29.0%. Starhub trailed Singtel closely at 27.9%. To be honest, this comparison took me by surprise.

On the back of my mind, I have always thought that M1 would rank the last given its cheaper mobile plans and weak competitive positioning against an upcoming 4th Telco.

However, the results show otherwise and M1 actually tops the score with a 36.5% EBITDA margin. Given that M1 lacks PAY TV services and other investments like Singtel and Starhub, it would probably mean that mobile services actually provide the best margins.

Which Telco Pays the Highest Dividend Yield?

 Singtel (SGX:Z74)Starhub (SGX:CC3)M1 (SGX:B2F)
Latest Dividend Per Share20.5 cents (includes 3 cents special dvd)16 cents11.4 cents
Share Price as of 28/09/2018S$3.24S$1.87S$2.11
Historical Dividend Yield6.3%8.6%5.4%

This is the main reason why Telcos are favoured by income investors – mouth-watering steady dividend yields.

As for this metric, Starhub dishes out the highest historical dividend yield at 8.6% with a share price of S$1.87.

Singtel ranks second with a 6.3% dividend yield. It has declared 20.5 cents dividend per share in FY2018, 3 cents higher compared to last year due to a special dividend. That said, investors should be aware that Singtel intends to revert back to the norm and distributes 17.5 cents for the next two years (FY2019 and FY2020).

Lastly, M1 has paid out 11.4 cents dividend per share. Based on the share price of $2.11 due to the take-over offer, M1’s dividend yield worked out to be 5.4%.

Fun fact: these 3 companies would rank among the top 10 in STI Index by their dividend yields if M1 is part of the STI Index.

Which Telco Has the Highest Pay Out?

 Singtel (SGX:Z74)Starhub (SGX:CC3)M1 (SGX:B2F)
Diluted Earnings Per Share33.4 cents14.1 cents14.3 cents
Dividend Per Share20.5 cents (includes 3cents special dvd)16 cents11.4 cents
Payout Ratio61%113%80%

Singtel’s FY2018 diluted earnings per share were 33.4 cents and with a dividend per share of 20.5 cents, the payout ratio would be 61% or 0.6.

Starhub’s earnings per share for FY17 was 14.1 cents. This means that Starhub paid out 113% of the earnings as dividends or a payout ratio of 1.1.

M1’s earnings per share for FY17 was 14.3 cents. This yielded a payout ratio of 80%, or 0.8, similar to their committed figure in the past.

Any number above 1 means it is unsustainable as you are paying out more dividends than you earn in net income. Unfortunately, Starhub falls under this camp with a payout ratio of 113%. This means that Starhub has been supplementing the dividend payments using the use of debt.

Currently, Starhub has a Total Debt/Equity ratio of 2.5x compared to Singtel’s 0.35x and M1’s 1.05x. In fact, Starhub’s dividends have tapered off to 4.0 cents per quarter compared to 5.0 cents at the start of year 2017. You can check out the dividend history here.

How sustainable is the Dividend Payout for each Telco?

 Singtel (SGX:Z74)Starhub (SGX:CC3)M1 (SGX:B2F)
Average Free Cash Flow per share past 5 years18.31 cents13.21 cents15.51 cents
Dividend per share20.5 cents (includes 3cents special dvd)16 cents11.4 cents
Sustainable?Yes, if exclude special dividendNoYes

I previously looked at the sustainability of the dividends’ payout using their earnings. In this section, I zoom further into their free cash flow per share which will take away their capital expenditure etc. to continue running the business. Furthermore, I have taken the average of their free cash flow per share over the past 5 years.

M1’s dividends are definitely sustainable as it is dishing out 11.4 cents dividends from an average free cash flow per share of 15.51 cents. M1 has kept to its word of paying out 80% of earnings as dividends which means that investors would expect lower dividends if M1’s earnings take a hit in future.

As for Singtel, if I were to exclude the 3 cents special dividend, the dividends per share amount to 17.5 cents. Singtel has generated an average Free Cash Flow per share of 18.31 cents.

This is higher than the usual dividend per share of 17.5 cents. Hence, I can believe that the dividend distribution is sustainable barring no big capital requirements from Singtel.

Starhub’s average Free Cash Flow per share for the past five years was about 13.21 cents. This is considerably lower than the dividend per share of 16 cents.

A check with Shareinvestor indicates that Starhub’s payout ratio has been trending up higher mainly due to lower earnings in the past 2 years. Moreover, Starhub’s dividend per share had been reduced by 20% from 20 cents to 16 cents yearly.

In our view, Starhub’s dividends may continue to decline further unless it dips into borrowings to pay out the dividends since its cash hoard of S$244K is insufficient to pay out the dividends in the next year.

Aside from that, Starhub may count on the S$16 million gain from the Joint Venture with Temasek. You can check out more here.

Final Thoughts

For many years, income investors (my dad is one of them) have taken a liking to Telco Stocks due to their relatively higher dividend yields among the many blue chips out there. They are revered as “cash cows” as they constantly churn out attractive dividends on clockwork.

That said, many investors are now worried about the heightened competition faced by the Telcos – emerging 4th Telco called TPG Telecom, Netflix taking over PAY Tv and the shift towards cheaper data plans.

If you would ask me which Telco is the best candidate to ride through all these and emerge the winner of this Telco Battle Royale, my answer is *drumroll* please…

The reasons are pretty straightforward. Singtel gives the highest chance of survival in this Telco price war with its diversified revenue base from its overseas associates and sharpened focus on Digital Life services.

Why I’d Not Invest In Singtel Despite It Is The Best Among The Three Largest Telcos.

All that being said, I will not invest in Singtel or any Telco as a matter of fact. Instead, I would go for a small cap dividend growth stock (i.e. Micro-Mechanics) for several reasons as shown below:

Singtel Micro-Mechanics
Market Capitalization (‘M) 50,663.66 248.87
5 Year CAGR Revenue Growth 0.80% 10.07%
5 Year CAGR Profits’ Growth* -0.78% 27.30%
Dividend Yield 5.60% 5%
Dividend Payout 0.52x 0.65x
*Excluding Singtel’s exception P&L of $1,940,400
**Usually 0.70x but Lesser Payout in FY2017 due to one-off P&L boost

Singtel is one of the darling bluechip stocks and has a huge market cap of S$50.6 billion. Thus, it is hard for any one segment of Singtel’s businesses to drive the growth of the entire group.

This reminds me of the quote from U.K. Investing Legend Jim Slater:

“Elephants don’t gallop”.

True enough, Singtel is a mature, established company which resembles that of an Elephant. On the other hand, Micro-mechanics’ market capitalization is a fraction of that compared to Singtel, which also means that there is a lot more room to grow.

In addition, Singtel’s top and bottom-line also seem to have gone into a stalemate over the past 5 years while Micro-mechanics has delivered double-digit growth in both revenue and net profits.

Last but not least, both companies offer a mouth-watering dividend yield of around 5%. Dividend payout ratios below 0.7x also signify a sustainable dividend policy for both companies.

Fun fact: Micro-mechanics has tripled its dividend per share from 3 cents in FY2014 to 9 cents in FY2018. Those who acquired its shares at a price of S$0.90 are sitting on 10% dividend yields now!

To wrap up, I believe that an investor doesn’t have to restrict himself to only bluechip stocks or Telco stocks for a steady stream of income. The better investment decision is to come up with a set of criteria and see which stocks will fall under your basket.

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James Yeo

Founder of SmallCapAsia.com. Ex-writer for Motley Fool Singapore and Yahoo Finance. Avid value-growth investor. Always on the lookout for investment ideas during shopping trips with the family!
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