Telefónica (BME:TEF) Is Paying Out A Dividend Of €0.1215

The board of Telefónica, S.A. (BME:TEF) has announced that it will pay a dividend on the 19th of June, with investors receiving €0.1215 per share. Based on this payment, the dividend yield on the company's stock will be 6.9%, which is an attractive boost to shareholder returns.

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Telefónica's Projections Indicate Future Payments May Be Unsustainable

Estimates Indicate Telefónica's Could Struggle to Maintain Dividend Payments In The Future

Telefónica's Future Dividends May Potentially Be At Risk

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Even though Telefónica isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. We generally think that cash flow is more important than accounting measures of profit, so we are fairly comfortable with the dividend at this level.

Over the next year, EPS is forecast to expand by 191.4%. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio getting very high over the next year.

Check out our latest analysis for Telefónica

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of €0.75 in 2015 to the most recent total annual 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.

The Dividend Has Limited Growth Potential

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Over the past five years, it looks as though Telefónica's EPS has declined at around 29% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

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. 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 is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 2 warning signs for Telefónica (of which 1 is potentially serious!) you should know about. Is Telefónica not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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