Stock Analysis

Don't Race Out To Buy Telenor ASA (OB:TEL) Just Because It's Going Ex-Dividend

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OB:TEL
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Telenor ASA (OB:TEL) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Telenor's shares on or after the 6th of October will not receive the dividend, which will be paid on the 19th of October.

The company's next dividend payment will be kr4.30 per share, on the back of last year when the company paid a total of kr9.30 to shareholders. Looking at the last 12 months of distributions, Telenor has a trailing yield of approximately 9.3% on its current stock price of NOK99.66. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Telenor has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Telenor

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Telenor distributed an unsustainably high 129% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 60% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Telenor's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
OB:TEL Historic Dividend October 2nd 2022

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Telenor's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Telenor has lifted its dividend by approximately 6.4% a year on average.

The Bottom Line

Has Telenor got what it takes to maintain its dividend payments? Earnings per share have barely moved in recent times, and the company is paying out an uncomfortably high percentage of its income. Fortunately its cash generation was somewhat stronger. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Telenor.

Although, if you're still interested in Telenor and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 3 warning signs with Telenor and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

Valuation is complex, but we're helping make it simple.

Find out whether Telenor is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About OB:TEL

Telenor

Telenor ASA, together with its subsidiaries, operates as a telecommunication company worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth4
Past Performance2
Financial Health2
Dividends5

Read more about these checks in the individual report sections or in our analysis model.

Established dividend payer and good value.