Read This Before Considering O2 Czech Republic a.s. (SEP:TELEC) For Its Upcoming Kč17.00 Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that O2 Czech Republic a.s. (SEP:TELEC) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase O2 Czech Republic's shares before the 18th of June in order to be eligible for the dividend, which will be paid on the 21st of July.

The company's next dividend payment will be Kč17.00 per share, on the back of last year when the company paid a total of Kč21.00 to shareholders. Looking at the last 12 months of distributions, O2 Czech Republic has a trailing yield of approximately 7.1% on its current stock price of CZK297. If you buy this business for its dividend, you should have an idea of whether O2 Czech Republic's dividend is reliable and sustainable. So we need to investigate whether O2 Czech Republic can afford its dividend, and if the dividend could grow.

Check out our latest analysis for O2 Czech Republic

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 87% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 72% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that O2 Czech Republic's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see O2 Czech Republic earnings per share are up 3.6% per annum over the last five years. A payout ratio of 87% looks like a tacit signal from management that reinvestment opportunities in the business are low. In line with limited earnings growth in recent years, this is not the most appealing combination.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. O2 Czech Republic's dividend payments per share have declined at 6.2% per year on average over the past 10 years, which is uninspiring. O2 Czech Republic is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is O2 Czech Republic worth buying for its dividend? Earnings per share have been growing modestly and O2 Czech Republic paid out a bit over half of its earnings and free cash flow last year. Overall, it's hard to get excited about O2 Czech Republic from a dividend perspective.

If you want to look further into O2 Czech Republic, it's worth knowing the risks this business faces. Case in point: We've spotted 2 warning signs for O2 Czech Republic you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. 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.
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