Tuesday, February 21, 2017

Starhub - Dividend Investing Gone Wrong

There are many developments in the Telecommunication industry with the entry of a fourth operator soon in Singapore. As we all know, Singapore has 3 Telcos here namely Singtel, Starhub and M1. The 4th Telco which is coming will be TPG telecom. Let's take a look at Starhub in this post and see what went wrong with the share price falling from a high of $4+ to $2.80 now.

Starhub was once a favourite with its defensive nature and good quarterly dividends. If we had invested in Starhub back in 2005 and hold it all the way to 2016, we would be getting a dividend yield of 15.4% (based on a price of $1.30) and also the value of the stock price has increased by 3 times. $5000 invested in 2005 would become about $15000 in 2016 and we would still be getting about $800 dividends annually from the initial $5000 invested.

However, those who invested at a high of $4 were in for a surprise when it tumbled all the way to $2.80 now.

Here's a look at the chart of Starhub:

As we can see, the share price has dropped over the years, most drastically when the 4th telco was announced by the government. M1 share price has also dropped but Singtel is still strong. I've not invested in Starhub or M1 but have shares in Singtel instead. Working in the telecommunication industry previously, I do know that it is a very competitive market with little growth if the companies are only in the traditional telco business in Singapore. Singtel on the other hand has expanded overseas with most of its profits from its associates and subsidiaries in other countries and also went into other businesses such as digital marketing and cyber security.

Starhub is a favourite among many shareholders because of its quarterly dividends of 5 cents which they give out for many years since 2009. A 5 cents dividend per quarter translates to a yield of 7.14% at current price of $2.80. However, in its latest FY 2016 results, Starhub announced it will lower its quarterly dividends to 4 cents for FY 2017. After 7 years, they decided to lower its dividends. Why is this so?

Let's dive in deeper into the business of Starhub to understand why its share price has dropped so much and moving forward how it will perform.

Mobile is the largest of its business

Revenue from its mobile business is at 50.7% of its total revenue. Pay TV is at 15.8%. Mobile revenue came in at $1.21 Billion for the whole of FY 2016 with $2.3 Million subscribers. This means averagely, each subscriber pays $43.87 a month to Starhub for their mobile plan subscription. The fourth telco, TPG telecom, will only come in about 2 years later where we will see the real impact. If for example 500K of Starhub subscribers switch over to TPG telecom, we will see about $263 Million revenue gone. This is 9.8% of its total revenue now.

Investing at the wrong time?

Investing is all about the business and how it will grow moving forward. In the case of Starhub, it is obvious there will be impact to its business thus the reaction of the share price. If we had bought at $4+ when the PE ratio was about 18x-20x, we would have thought it was only slightly expensive. Even at $4, the dividend yield was 5% then.

However, as business sentiments changes with the introduction of new competition, the valuation changes as well. For this case, it is quite easy to see the impact as its reported all over the news for the new 4th telco. For other industries, it may not be so straight forward. Any companies' revenue and profit can be eroded anytime. As such, it is important that we always have a forward looking view for our investments and monitor the financial performance of a company. Remember the valuations will change according to the business environment. Stock price also tend to be forward looking where it will drop before the actual profits gets affected.

Is it a good buy now?

The fourth telco will certainly make the telecommunication industry more competitive and take away market share from the existing incumbents. I believe the market is trying to make sense of what is going to happen and is pricing in the impact now. The current PE ratio of Starhub is 14x. If we see the Earnings per share (EPS) drop by 10%, the PE ratio will be at about 15.7x. This looks like its trading at fair value with a slight discount at current price, taking into consideration the impact in the future.

The dividend yield, if the company maintains its dividend of 4 cents every quarter, will be at 5.7%. This is quite fair but the question is whether the company will continue paying this dividend or drop it even further? The real impact has not come in yet so everything is just speculation now. It may turn out that the 4th telco impact may be just 5% instead of 10%. If that's the case, PE will be at 14.9x which is more attractive. This is an interesting space to watch for the next 2 years. Will you invest in Starhub at current prices?

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  1. No, there are better stocks.

    1. Indeed there are better stocks. The risk and reward is just not there for now

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