Singapore Telecommunications Limited (SGX:Z74) is on an uptrend but the financial outlook looks quite weak: is the stock overvalued?

Singapore Telecommunications (SGX:Z74) has had a strong run in the equity market, with its stock rising 13% in the past three months. However, we have decided to pay close attention to its weak financials as we doubt the current momentum will continue given the scenario. In particular, we will be paying attention to the ROE of Singapore Telecommunications today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Singapore Telecommunications

How to calculate return on equity?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Singapore Telecommunications is:

4.3% = $1.2 billion ÷ $28 billion (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. This therefore means that for each SGD1 of its shareholder’s investments, the company generates a profit of SGD0.04.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Singapore Telecommunications earnings growth and ROE of 4.3%

At first glance, Singapore Telecommunications’ ROE does not look very promising. Then, compared to the industry average ROE of 11%, the company’s ROE leaves us even less excited. Therefore, it may not be wrong to say that the 35% decline in net income over five years seen by Singapore Telecommunications is likely the result of lower ROE. However, there could also be other factors leading to lower income. For example, the company has a very high payout ratio or faces competitive pressures.

So, as a next step, we benchmarked Singapore Telecommunications’ performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 11%. during the same period.

SGX: Z74 Past Earnings Growth May 1, 2022

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. Is the Z74 correctly valued? This intrinsic business value infographic has everything you need to know.

Is Singapore Telecommunications effectively reinvesting its profits?

With a three-year median payout ratio reaching 109%, Singapore Telecommunications’ earnings decline comes as no surprise as the company pays out a dividend that is beyond its means. Paying a dividend beyond their means is generally not sustainable in the long term. To learn about the 2 risks we have identified for Singapore Telecommunications, visit our risk dashboard for free.

Moreover, Singapore Telecommunications has been paying dividends for at least a decade, suggesting that management must have perceived that shareholders preferred dividends to earnings growth. Our latest analyst data shows the company’s future payout ratio is expected to drop to 62% over the next three years. As a result, the expected decline in Singapore Telecommunications’ payout rate explains the company’s expected future ROE increase to 10% over the same period.

Summary

Overall, the performance of Singapore Telecommunications is quite disappointing. The low ROE, combined with the fact that the company pays out almost all, if not all, of its earnings in the form of dividends, has resulted in little or no earnings growth. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Meredith Campagna

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