The 1H 2020 results of Globe Telecom (GLO) showed a slowdown in the net cash flows from operating activities by -31% to 24.3 Billion Pesos. The result marked the effect of the COVID-19 pandemic on the telecommunications industry in the Philippines.
The slowdown in the operating cash flows indicates that it has to conserve cash. Let it be noted that Globe was fast in letting go of its employees and in closing some of its store fronts.
Globe has to conserve cash especially that based on its first half results it has total loans payable before the year ends of 22 Billion Pesos while its cash balance stood at only 14.8 Billion Pesos. It has limited resources at it disposal at this time.
With cash flows from operations slowing, GLO has to borrow more to fund its capital expenditures. With no less that the President of the Republic calling them to improve their services before the year ends, Globe can not abandoned their capital expenditures using the pandemic as an excuse. The President gave the telcos the marching order to look for capital to improve their services. The President even said that if you don’t have money you don’t do business, showing the President’s deep knowledge on how our telcos are financially run.
Over the years Globe has funded its cash dividends from borrowings. Globe borrows money to pay cash dividends and debts while capital expenditures are funded from revenues or cash flows from operations. This is generally the trend over the years. Only in 2019 that Globe did not borrow money to pay dividends because it has stellar cash flows from operations (74 Billion Pesos from 58 Billion Pesos in 2018) but even then the cash dividend drastically reduced its cash balance at the end of 2019 to just 8.3 Billion Pesos. No one has expected the pandemic, Globe may then have been expecting another stellar year in 2020.
With a low cash balance to start with plus a weak operating cash generation, it has to borrow money to fund their capital expenditures to improve their services as called for by the President. The demand for capital expenditures and for the repayment of debts falling due this year under a weak cash flow generation regime requires Globe to borrow money.
The borrowing requirements for capital expenditure and debt repayment will leave a little space for borrowing for cash dividends.
For now the indicative dividend yield for GLO is at 4.7%, that could go down to zero.
Of course that could only go down to zero if the Ayala Group will choose to bow down to the demands of the President and the public. Or they could play down capital expenditures and choose to reward themselves and the other GLO stockholders and investors. Or they could choose to borrow more for capital expenditures, debt repayment, and cash dividend risking putting the company to a point of unsustainability. It is worth following up in the next quarter.
Should GLO scrap its dividend and instead use the scant resources available for network improvements then it would be very positive for its stock price. Massive investment in networks signals growth. Shares can sky rocket.
Disclaimer: This is an independent analysis with the objective of informing readers about company fundamentals. Accuretti Systems Inc. does not own any shares of Globe Telecom.