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GLO borrowed money to pay borrowed money, share price may eventually go down as dividend cut looming

For the nine months ending September 30, 2020 Globe Telecom (GLO) generated 45.8 Billion Pesos of cash from operations. That cash flow from operations for nine months is 17.18% lower than last year’s 55.3 Billion Pesos.  The lower cash flows from operations is no doubt driven by the slowdown in the economic activity brought about by the COVID-19 pandemic.

The slowdown in the cash flows from operations gives GLO little room to maneuver its finances.  Of the 45.8 Billion Pesos cash generated from operations, GLO spent a net 33.8 Billion for investments in its network and businesses. Leaving 12 Billion Pesos for GLO for distribution to shareholders and debt payments.

There is 12 Billion Pesos left because GLO only invested a net 33.8 Billion for its network and business.  With competitors building brand new networks, GLO cannot afford to just spend under 50 Billion Pesos a year to be competitive.  CNVRG is expanding its brand-new end-to-end proprietary fiber network all across the country.  Then there is Dito Telecommunity who aims to not just be a third telco but to be the dominant telco.  Dito Telecommunity is building a brand network with financial and technical support from China Telecom. GLO underinvesting in its network poses an erosion to its business.

It is evident in GLO’s income statement that its network is not at all up to date. Depreciation and amortization, and impairment charges in the income statement rose by a combined 2.8 Billion Pesos.  That indicated an acceleration of impairment of old technologies.

The 12 Billion Pesos of free cash flow is not even enough to pay dividends and interest of loans.  Dividends distributed are at 10.7 Billion Pesos and interest payments is at 5.3 Billion Pesos for a total of 16 Billion Pesos.  The situation forces GLO to borrow money to repay borrowed money and boosts its cash balance. GLO ended the period with a cash balance of 32.6 Billion Pesos.

The demand for network investments and repayment of debts threatens GLO’s ability to distribute dividends.  Most investors invest in telcos like utilities for their dividend yield. When dividends are cut telco shares also go down to maintain the dividend yield.

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Disclaimer and Disclosure: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent viewpoint.  Accuretti Systems Inc. in day-to-day trading may have owned, or is considering buying or disposing, the shares of the companies mentioned in this commentary.

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