Telecom Plus (LON:TEP) Is Increasing Its Dividend To £0.47

Telecom Plus Plc (LON:TEP) has announced that it will be increasing its dividend from last year's comparable payment on the 23rd of August to £0.47. This takes the annual payment to 4.7% of the current stock price, which is about average for the industry.

See our latest analysis for Telecom Plus

Telecom Plus' Dividend Is Well Covered By Earnings

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. We think that this practice can make the dividend quite risky in the future.

Over the next year, EPS is forecast to expand by 37.9%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 72% which brings it into quite a comfortable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was £0.35 in 2014, and the most recent fiscal year payment was £0.83. This works out to be a compound annual growth rate (CAGR) of approximately 9.0% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Telecom Plus has impressed us by growing EPS at 16% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Telecom Plus' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Telecom Plus' payments are rock solid. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 3 warning signs for Telecom Plus that investors should know about before committing capital to this stock. 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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