Telefónica Deutschland Holding (ETR:O2D) Will Pay A Dividend Of €0.18

The board of Telefónica Deutschland Holding AG (ETR:O2D) has announced that it will pay a dividend of €0.18 per share on the 24th of May. This means the annual payment is 6.2% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Telefónica Deutschland Holding

Telefónica Deutschland Holding Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Telefónica Deutschland Holding's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Looking forward, earnings per share is forecast to fall by 82.8% over the next year. If the dividend continues along the path it has been on recently, the company could be paying out more than double what it is earning, which is definitely a bit high to be sustainable going forward.

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 first annual payment was €0.45, compared to the most recent full-year payment of €0.18. This works out to be a decline of approximately 9.7% per year over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth Could Be Constrained

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's encouraging to see Telefónica Deutschland Holding has been growing its earnings per share at 50% a 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. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Telefónica Deutschland Holding is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 4 warning signs for Telefónica Deutschland Holding (1 doesn't sit too well with us!) 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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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.