Could O2 Czech Republic a.s. (SEP:TELEC) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
With O2 Czech Republic yielding 9.4% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. 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 typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, O2 Czech Republic paid out 92% of its profit as dividends. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. O2 Czech Republic paid out 67% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. While the dividend was not well covered by profits, at least they were covered by free cash flow. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
We update our data on O2 Czech Republic every 24 hours, so you can always get our latest analysis of its financial health, 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. O2 Czech Republic has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was Kč40.0 in 2010, compared to Kč21.0 last year. The dividend has shrunk at around 6.2% a year during that period. O2 Czech Republic's dividend has been cut sharply at least once, so it hasn't fallen by 6.2% 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 10 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. It's good to see O2 Czech Republic has been growing its earnings per share at 10% a year over the past five years. Although earnings per share are up nicely O2 Czech Republic is paying out 92% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
Conclusion
To summarise, shareholders should always check that O2 Czech Republic's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that O2 Czech Republic paid out such a high percentage of its income, although its cashflow is in better shape. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, O2 Czech Republic comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for O2 Czech Republic (of which 2 are significant!) you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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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