Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Historically, United Internet AG (FRA:UTDI) has been paying a dividend to shareholders. Today it yields 2.5%. Let’s dig deeper into whether United Internet should have a place in your portfolio.
5 checks you should use to assess a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Is their annual yield among the top 25% of dividend payers?
- Has it paid dividend every year without dramatically reducing payout in the past?
- Has it increased its dividend per share amount over the past?
- Can it afford to pay the current rate of dividends from its earnings?
- Will the company be able to keep paying dividend based on the future earnings growth?
How well does United Internet fit our criteria?
United Internet has a trailing twelve-month payout ratio of 183%, meaning the dividend is not sufficiently covered by its earnings. However, going forward, analysts expect UTDI’s payout to fall into a more sustainable range of 39% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 3.0%. Furthermore, EPS should increase to €2.28, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. The reality is that it is too early to consider United Internet as a dividend investment. It has only been consistently paying dividends for 9 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
Relative to peers, United Internet has a yield of 2.5%, which is on the low-side for Telecom stocks.
Now you know to keep in mind the reason why investors should be careful investing in United Internet for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three fundamental aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for UTDI’s future growth? Take a look at our free research report of analyst consensus for UTDI’s outlook.
- Valuation: What is UTDI worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether UTDI is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.