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I think it is no secret to regular readers of my blog that Singtel is my biggest holding within my portfolio. Actually it is more than what I will typically like to have for a single stock. It is the only stock that has >5% of my portfolio by values. With the recent announcement of its full year results, I took another look at Singtel’s financials to make sure that I can keep my faith, particularly on its ability to pay dividends.
However, I have to admit upfront that I am no expert in telecommunication business and Singtel is a relatively complex multinational company to analyse with so many moving parts at the same time. In this blog, I thought I will just share my simple way of analysing Singtel and hope it is useful to you.
I invest in Singtel primarily for the high dividend yield coupled with the confidence I have in their ability to sustain the dividend distribution of 17.5 cents going forward. This dividend amount was started since 2015 and we can expect it to persist for the next two years (2019 & 2020) as guided by the management lately. This amount represents a historical payout ratio of ~ 74% of underlying net profit for 2015-2017. The 2018 payout ratio was 81% due to a special dividend of 3 cents from the IPO of Netlink Trust and a 8% decline in net profit.
I have been accumulating Singtel since the share price started to decline from $3.80. I am still buying lately with my last trade at $3.35 last week. My average cost today is $3.60 per share and yes, I am losing money by ~ 10%.
At 17.5 cents dividend, its dividend yield was 4.6% at $3.80 and I thought that was a good deal. With the benefit of the 6/6 hindsight, maybe I should have waited … but no regret lah …
At its current price of $3.33, the yield has increased even further to 5.25%. In my mind, I am thinking …. “where to get a blue chip company with a dominant 52% market share of the mobile service in a mature market and paying 5.25% dividend yield”. That kind of thought justifies my deviation from the conventional wisdom of not concentrating > 5% of my portfolio value in a single company.
Although I don’t think that Singtel dividend amount will plunge significantly after the 2 years, I do expect their net profit to decline gradually … unless they start taking on more risk to grow their revenue again. But I don’t sense that kind of aggression from the current management.
Having said that, their existing businesses are relatively mature (thought not without challenges) to provide some certainty to their profitability and cashflow. Their gearing is reasonable at ~ 25% so I think the financial risk is manageable. Its PE ratio (excluding exceptional item) is ~ 14 at current share price, which does not seem grossly overvalued.
While Singtel dividend policy is to pay out 60-75% of net profit, historically, it is closer to the top end of that range. On a conservative front, I think it should be able to maintain at least 16 cents for the foreseeable future. The 16 cents dividend was first reached in 2011 before it went to 16.8 cents and now 17.5 cents.
At 16 cents, it will yield 4.4% on my current average cost. If investors continue to expect 5.25% yield at 16 cents, then SingTel share price will have to decline to $3.05. We will have to go back to the Lehman Financial Crisis in 2009 and before year 2007 to find Singtel trading at this price level. Will the share price goes back there? Maybe …. unfortunately SPH is one example already – I would never thought in my nightmare that it would go below $2.50 but it did. Though Singtel doesn’t face the same industry disruptive forces as SPH, it is not immune. The rapid shift from voice to data probably caught many people by surprise. The breakthough in 5G and possibly 6G and beyond may open up new possibilities that will require Singtel to adapt rapidly. Can a big company like Singtel stay ahead of the curve? Even SIA is struggling to do so despite its excellent brand name in the traditional brick and mortar airline industry.
So candidly, if Singtel share price does rebound, I may take the opportunity to trim my holding to closer to 5%. However, i don’t foresee it dropping out of its top seat in my portfolio anytime soon. Meanwhile, I will enjoy my 4.86% yield on cost, which should be supportive of my 5% annual target. I may even use the dividend to average down on Singtel if the opportunity appears.
The other thought I have in my mind is the wish to see more hunger from Singtel management. Be more aggressive and take the challenges head-on, knock them out!
Happy to get your comments on Singtel too.
For our local folks, have a great holiday on Tuesday and for everyone, a great investment week ahead.