Telefónica (BME:TEF) Has Announced A Dividend Of €0.1215

Telefónica, S.A.'s (BME:TEF) investors are due to receive a payment of €0.1215 per share on 20th of June. The dividend yield will be 7.2% based on this payment which is still above the industry average.

See our latest analysis for Telefónica

Telefónica 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. Telefónica is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in the business. This gives us some comfort about the level of the dividend payments.

The next 12 months is set to see EPS grow by 180.4%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 135%, 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. Since 2014, the annual payment back then was €0.75, compared to the most recent full-year payment of €0.30. Doing the maths, this is a decline of about 8.8% per year. A company that decreases its dividend over time generally isn't what we are looking for.

Dividend Growth Is Doubtful

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. In the last five years, Telefónica's earnings per share has shrunk at approximately 6.1% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

The Dividend Could Prove To Be Unreliable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Telefónica has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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