TPG Telecom Limited (ASX:TPG) is about to trade ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase TPG Telecom's shares before the 15th of March in order to be eligible for the dividend, which will be paid on the 13th of April.
The company's next dividend payment will be AU$0.085 per share, on the back of last year when the company paid a total of AU$0.17 to shareholders. Last year's total dividend payments show that TPG Telecom has a trailing yield of 3.0% on the current share price of A$5.63. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, TPG Telecom paid out 279% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 41% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while TPG Telecom's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see TPG Telecom has grown its earnings rapidly, up 44% a year for the past five years.
Unfortunately TPG Telecom has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
Is TPG Telecom worth buying for its dividend? Earnings per share have been rising nicely although, even though its cashflow payout ratio is low, we question why TPG Telecom is paying out so much of its profit. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we've discovered 2 warning signs for TPG Telecom (1 is significant!) that you ought to be aware of before buying the shares.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.