Telefónica Deutschland Holding's (ETR:O2D) Dividend Will Be €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 20th of May. This means the annual payment is 7.5% of the current stock price, which is above the average for the industry.

See our latest analysis for Telefónica Deutschland Holding

Telefónica Deutschland Holding Is Paying Out More Than It Is Earning

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Telefónica Deutschland Holding's dividend was higher than its profits, but the free cash flows quite comfortably covered it. 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.

Over the next year, EPS is forecast to expand by 15.8%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 166%, which probably can't continue without putting some pressure on the balance sheet.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was €0.45 in 2014, and the most recent fiscal year payment was €0.18. The dividend has shrunk at around 8.8% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Telefónica Deutschland Holding's Dividend Might Lack Growth

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. We are encouraged to see that Telefónica Deutschland Holding has grown earnings per share at 53% per year over the past five years. Strong earnings is nice to see, but unless this can be sustained on minimal reinvestment of profits, we would question whether dividends will follow suit.

In Summary

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.

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 instance, we've picked out 2 warning signs for Telefónica Deutschland Holding that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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