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. The payment will take the dividend yield to 4.6%, which is in line with the average for the industry.

View our latest analysis for Telecom Plus

Telecom Plus' Earnings Easily Cover The Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Telecom Plus' dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. This is a pretty unsustainable practice, and could be risky if continued for the long term.

Over the next year, EPS is forecast to expand by 37.9%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 72% which would be quite comfortable going to take the dividend forward.

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 dividend has gone from an annual total of £0.35 in 2014 to the most recent total annual payment of £0.83. This works out to be a compound annual growth rate (CAGR) of approximately 9.0% a year over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Telecom Plus Might Find It Hard To Grow Its Dividend

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 seen EPS rising for the last five years, at 16% per annum. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think Telecom Plus' payments are rock solid. Strong earnings growth means Telecom Plus has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 3 warning signs for Telecom Plus 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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