Singtel (Z74) - A crumbling blue chip
The telecommunications sector have been nothing but a disaster in the recent years globally, with shares from AT&T, Verizon, to local shares like Starhub, M1, and Singtel falling drastically. While Singtel is the least hurt in the fall, they still fell by a significant amount from $4.1 to $3.1 (~26%). In this post we will discuss if this is a bargain buy or if this company is slowly tumbling, mainly the sustainability of dividends.
The board themselves announced that the current dividend payout is no longer sustainable given the weakening financials that the company has, and that they would only maintain the dividends for at most another 2 years and subsequently we are likely to see a dividend cut.
Here are some key ratios that are of concern.
As we can see, payout margin increased significantly given the plunge in EPS, attributable to the fall in associates income. This is caused by both the divestment of Netlink and increased competition in India, which Singtel invested a lot of money in. From the looks of it, this is clearly a competition that Singtel cannot win as they are attempting to fight a price war with a much larger competitor in a foreign land with their local competitor.
This drop in associates income is likely to persist or even get a turn for the worse as Singtel gets slowly ousted out by other countries' local giants. The Q1 results for Singtel is already out and underlying net profit (UNP) fell significantly again from $909m to $733m. Since every quarter's earning are rather similar in 2018, extrapolating the data for an annualized underlying net profit would give us a 2019 full year earning of $2,932m. 2018's full year UNP was $3,593m. This would represent a drop of 18.4%.
Holding shares dilution constant (which is probably not the case), we would be looking at an UNP EPS fall to $0.177, just barely enough to cover the dividends payout, assuming they maintain at the current rate, then representing a payout ratio of 98.8%.
Given Singtel's dividend policy of 60-75% payout, we will have the following scenarios at a UNP EPS of $0.177.
At 60% payout ratio, dividend per share would be $0.1062 or 10.62 cents
At 75% payout ratio, dividend per share would be $0.1327 or 13.27 cents
At the current share price of $3.14, it would net us a yield of 3.38% and 4.22% respectively. Since these dividend yield are not far from the norm, since STI ETF yield is approximately 3.5%, it will be highly likely and also very easy for Singtel's management to cut to these yields since it would appear normal. They do not have a particularly strong reason to struggle to maintain the current dividend payout.
Singtel's share price was $3.41 the day after the announce of full year 2018's results, assuming that no further information is taken into account, this price would reflect the market sentiment given the weakened earnings. From the above, we can see that in 2019 we would expect a fall of 18.4% in UNP EPS from this earning. Similarly, the same drop in share price would bring us to $2.78. If the market sentiment is the same as that for 2018.
At $2.78, the new yields given the payout described above would be 3.8% (60% payout) and 4.77% (75%) payout respectively. These values looks very similar to the industry and market norm for dividend yields and in my opinion it is highly likely for the company to shift in this direction in the coming future unless there is a huge upturn (very unlikely).
If we take into consideration the escalating trade war between USA and China, the eurozone crisis and the generic poor financial economy globally, further downside would not be surprising and share prices lower than $2.78 can be easily seen in the coming years.
In my analyses I always tend to take a worse-case scenario but personally for this case I would say this is already not the worse-case but I am simply extrapolating current data and taking whatever situation status quo. Should there be further negative externalities the next possible mark Singtel's share price can fall to would be their net asset value of $1.8 per share, assuming normal liquidation conditions.
I would recommend a sell on this stock as of writing and are looking to reduce my Singtel holdings. We can probably look to buy again after the dividend cut if the share price is attractive and if the business can sustain that new level of dividends at whichever the share price and yield.
https://www.singtel.com/about-us/investor-relations/financial-results#
https://www.singtel.com/about-us/investor-relations/dividends