Looking For Steady Income For Your Dividend Portfolio? Is O2 Czech Republic a.s. (SEP:TELEC) A Good Fit?

Today we'll take a closer look at O2 Czech Republic a.s. (SEP:TELEC) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With O2 Czech Republic yielding 9.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding O2 Czech Republic for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on O2 Czech Republic!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 97% of O2 Czech Republic's profits were paid out as dividends in the last 12 months. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. With a cash payout ratio of 91%, O2 Czech Republic's dividend payments are poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given O2 Czech Republic's payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.

Is O2 Czech Republic's Balance Sheet Risky?

As O2 Czech Republic's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. O2 Czech Republic has net debt of 0.82 times its EBITDA, which we think is not too troublesome.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. O2 Czech Republic has interest cover of more than 12 times its interest expense, which we think is quite strong.

Consider getting our latest analysis on O2 Czech Republic's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of O2 Czech Republic's dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was Kč50.00 in 2010, compared to Kč21.00 last year. The dividend has shrunk at around 8.3% a year during that period. O2 Czech Republic's dividend has been cut sharply at least once, so it hasn't fallen by 8.3% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying O2 Czech Republic for its dividend, given that payments have shrunk over the past ten years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Earnings have grown at around 9.1% a year for the past five years, which is better than seeing them shrink! Although per-share earnings are growing at a credible rate, virtually all of the income is being paid out as dividends to shareholders. This is okay, but may limit growth in the company's future dividend payments.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with O2 Czech Republic paying out a high percentage of both its cashflow and earnings. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Overall, O2 Czech Republic falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 O2 Czech Republic analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.