Starhub's Dividend Yield

On Starhub's dividend yield, there have been concerns that it is unsustainable, leading to the 'stagnancy' of Starhub's share price. The main reasons given are

(i) eroding market share for mobile and broadband subscribers
(ii) loss of EPL and ESPN rights for pay TV
(iii) EPS is below 20 cents

I shall attempt to look at each of those points in a layman method.



(i) Eroding of market share
In fact, it didn't happen. All three telcos reported an increase in subscribers recently.

Now the question is, were any of them lying? How could such a small country like Singapore enable all 3 telcos to have more subscribers even though we have one of the highest percentage of mobile phone penetration?

The reason comes from a few factors. Firstly, there are people who uses two lines, not just one. Examples include housing agents, tuition agencies, insurance agents, business owners, sales executives, etc. Some of these people separate clearly their phone lines between personal and work. Hence the need for both lines.

Another reason could be because more and more kids are starting to use mobile phones as Singaporeans get more affluent overall. Compare to the time I was in secondary school, most of us do not own a mobile phone.

Yet another reason could be because the population in Singapore is still increasing due to increase in PRs and foreigners.

We could cook up many reasons, but fact is, mobile phones are starting to become a necessity. The same goes for broadband. In affluent Singapore, how many are still using dial up modems?

The next in line could be mobile broadband. We shall see how this develops out. Who knows, it might eventually be another 'necessity' to Singaporeans.

So, the probability of customers getting lesser isn't very high as consumers of such 'necessities' will inevitably increase due to limited market competitors and increase in population. Add on the fact, having more subscribers does not increase the cost of infrastructure maintenance significantly. This is coming from an electrical engineer's point of view. Think about how often you change your telephone wires or electrical wiring and you would know how often Starhub needs to change theirs.

Starhub would do well to fight for more customers to achieve greater economies of scale by reducing their average fixed costs. This, could easily be attained as the population grows slowly.

And this, is the beauty of an infrastructure stock.


(ii) Loss of EPL and ESPN Rights
This is the greatest concern of most investors. However, here, I would have a few counter arguments as well.

Firstly, Starhub's pay TV does not included only EPL and ESPN. Some other popular channels include HBO, CNN News, Discovery Channel, BBC, National Geographic, etc. Many people subscribed for these channels as well. The general consensus is that Starhub's pay TV has much more variety as compared to Singtel's Mio TV.

So the multi-million dollar question here is, will the loss of EPL and ESPN affect Starhub much?

I doubt it.

According to Starhub, their current sports package is currently priced below the cost of the content that makes up their package. That means, although losing EPL and ESPN might seem like a bad thing, overall, the loss might be a 'blessing' to Starhub's profitability instead. At worst, the change is little.

And also, according to Starhub, sports fans can continue to catch delayed telecast on their Goal TV1 and Goal TV2. Not as exciting for a true sports fan, but for those who are lazy to change, it's an alternative.

Finally, a large portion of the Hubbers would likely stay with Starhub's other pay TV programmes as well, as soccer is not the main reason why they signed up for Hub TV in the first place.

But Starhub is not getting complacent at all with such a huge variety of programmes as compared to Mio TV's.

Starhub is also recently offering more basic packages for free. This is viewed positively by me on their efforts to retain their customers. Do note that for infrastructure, offering this extra service comes at virtually no extra cost to Starhub, yet makes it all the more worthwhile to remain as a customer of Hub TV.

Next, Starhub's penetration into the Singapore pay TV market is 46.7%. There's possibly more room for improvements in this area over the next few years.

Of course, the true impact will only be known on Jun 2010 onwards. Let's see how it pans out. My belief is that the impact will be minimal.


(iii) EPS is below 20 cents

True, but Starhub's free cash flow is about 26 cents per share in 2009, an increase from the 23.6 cent per share in 2008. It exceeds the dividend payout of 20 cents per annum (for both years).

Free cash flow here refers to net cash from operating activities less purchase of fixed assets in the cash flow statement.

To me, Starhub has the capability to increase its dividends further. However, they are prudent in conserving cash to pare down some debt and increase their cash holdings.

Such infrastructure company is extremely defensive since it has almost become a 'necessity' in Singapore. In addition, since so many people are under contract, and the probability of them exiting before their contract terminates is low, Starhub's revenue would likely remain fairly constant in the next 1 year or so.

Not only that, Starhub has been surprising me since its inception. The first to offer free dial up internet, the first to offer free incoming calls, and now, the first to offer 12GB for their iphone plans, forcing all other service providers to do the same.

In this market with extremely high barrier of entries, Starhub would likely continue to maintain their market hold and revenue, and sustain this dividend payout with ease.