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Yield Watch: Telechoice revisited. Dividend Payout Sustainable?

Telechoice is a yield stock that i notice quite long ago. I recall blogging about its full year performance in 2007. Since then i have invested and divested with it.

A note to all: All figures used in this analysis can be found in this spreadsheet here [spreadsheet here >>]

What does it do?

Its a stock that ties up with its parent ST Telemedia to offer Personal Communication Services to mainly ST Telemedia's pet Telco Starhub and other engineering and network service to it.

What it means is that should Starhub sells more handsets or engage in more capex, it bodes well for Telechoice. Personal Communication Services (PCS) is VERY low margin. Although you can see that it earns quite a fair bit of revenue, its PCS profits are quite small.

Very Strong Share Price through Economic Crisis

Click to see bigger chart

The surprising thing is that every tom dick and harry corrected big during that crisis but telechoice is still range bound. Even now during the recovery, it is range bound as well.

This is likely attributable to the demand for handsets and capex required by starhub for 3G infrastructure remaining strong.

What this means that although it came out of the economic crisis strong and relatively ok (if you are a shareholder holding the shares), a change in business condition might increase its business and profit risk

How is the dividend payout? Is it sustainable?

Generally, if you are thinking of investing in Telechoice, you are looking for a good long term yield and Telechoice provides a long term of around 7-8%.

This is mainly because the share price ends up not appreciating and that the dividend payout remains the same!

Take a look at this chart of Dividend payout yield vs FCF (Free Cashflow Yield). For those that seldom come across free cashflow, it is the operating cashflow telechoice collected minus the capital expenditure needed in the year. This shows how much dividends a company like telechoice can payout, out of its normal operations.

Dividend yield have been consistent at 7-9% or so, but the free cashflow is wild. When the Red FCF is less than the Blue Dividend yield it means the profits from business are not able to fund the dividend after capex.

So how are they funding the dividend payment in those years? Judging by the balance sheets, its definitely not by long term debt.

There are 3 years where dividend payout is more than FCF. these are 2006,2007 and currently 2009.

In 2oo6, they fund that by using their 44 mil in cash holdings (see Cash from 44.6 mil to 28.9 mil)

In 2007, observe that there is a build up in current liabilities increase quite substantially (see current liabilities 46 mil to 85 mil)

The puzzling one is in 2009, because both liabilities have decrease and cash have increase. I did some digging and it would seem there is a divestment of a subsidiary perhaps thats why they have additional cash that goes to paying the dividends.

So is dividend sustainable? Hard to say. At current share price of 23.5 cents they always pay out around 9 mil for dividend. Their current cash holdings allow them to pay out for 5 years even if they are not earning money. I feel even if they want to sustain it they can take on some long term debts, but they probably won't do that. In these cases, if you are looking for consistent 7% for 5 years, i would say it can definitely take it.

However, what i normally look for in my investments is a sustainable free cashflow greater than the dividend payout. A good example are the telcos in Singapore [Analysis here >>]

In that aspect i would rather invest in Starhub then this.

Let me know what you guys think.

Disclosure: Not Vested Telechoice