Key Things To Watch Out For If You Are After Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's (BUSE:MTELEKOM) 4.8% Dividend

Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A high yield and a long history of paying dividends is an appealing combination for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság. It would not be a surprise to discover that many investors buy it for the dividends. The company also returned around 1.2% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság paid out 48% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság paid out 75% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

We update our data on Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was Ft50.0 in 2011, compared to Ft20.0 last year. This works out to be a decline of approximately 8.8% per year over that time. Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's dividend has been cut sharply at least once, so it hasn't fallen by 8.8% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Earnings have grown at around 9.2% a year for the past five years, which is better than seeing them shrink! Earnings per share have been growing at a credible rate. What's more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it.

Conclusion

To summarise, shareholders should always check that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

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. For instance, we've picked out 2 warning signs for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság that investors should take into consideration.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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