Telefónica Deutschland Holding (ETR:O2D) Has Announced A Dividend Of €0.18

Telefónica Deutschland Holding AG (ETR:O2D) has announced that it will pay a dividend of €0.18 per share on the 24th of May. The dividend yield will be 6.7% based on this payment which is still above the industry average.

See our latest analysis for Telefónica Deutschland Holding

Telefónica Deutschland Holding Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the company was paying out 254% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 55%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

EPS is set to fall by 85.1% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach over 200%, which could put the dividend under pressure if earnings don't start to improve.

Telefónica Deutschland Holding's Dividend Has Lacked Consistency

Looking back, Telefónica Deutschland Holding's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2013, the dividend has gone from €0.45 to €0.18. This works out to be a decline of approximately 9.7% per year over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Dividend Growth Could Be Constrained

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Telefónica Deutschland Holding has impressed us by growing EPS at 50% per year over the past five years. While EPS is growing rapidly, Telefónica Deutschland Holding paid out a very high 254% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

In Summary

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Telefónica Deutschland Holding's payments, as there could be some issues with sustaining them into the future. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 4 warning signs for Telefónica Deutschland Holding (1 makes us a bit uncomfortable!) that you should be aware of before investing. Is Telefónica Deutschland Holding not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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