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Why You Should Leave Singapore Telecommunications Limited (SGX:Z74)'s Upcoming Dividend On The Shelf

Simply Wall St

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Singapore Telecommunications Limited (SGX:Z74) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 26th of July to receive the dividend, which will be paid on the 15th of August.

Singapore Telecommunications's upcoming dividend is S$0.11 a share, following on from the last 12 months, when the company distributed a total of S$0.17 per share to shareholders. Based on the last year's worth of payments, Singapore Telecommunications stock has a trailing yield of around 4.9% on the current share price of SGD3.54. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Singapore Telecommunications can afford its dividend, and if the dividend could grow.

See our latest analysis for Singapore Telecommunications

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Singapore Telecommunications paid out 92% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Singapore Telecommunications generated enough free cash flow to afford its dividend. It paid out 86% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Singapore Telecommunications's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

SGX:Z74 Historical Dividend Yield, July 22nd 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Singapore Telecommunications's earnings per share have been shrinking at 3.7% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Singapore Telecommunications has lifted its dividend by approximately 3.4% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Singapore Telecommunications is already paying out 92% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Should investors buy Singapore Telecommunications for the upcoming dividend? Earnings per share have been in decline, which is not encouraging. Worse, Singapore Telecommunications's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Singapore Telecommunications.

Curious what other investors think of Singapore Telecommunications? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.