Here's Why We're Wary Of Buying Telenor's (OB:TEL) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Telenor ASA (OB:TEL) is about to go ex-dividend in just 3 days. Typically, the ex-dividend date is two business days 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. Accordingly, Telenor investors that purchase the stock on or after the 22nd of May will not receive the dividend, which will be paid on the 3rd of June.

The company's next dividend payment will be kr05.00 per share, on the back of last year when the company paid a total of kr9.60 to shareholders. Based on the last year's worth of payments, Telenor stock has a trailing yield of around 6.2% on the current share price of kr0154.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Telenor paid out 142% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. It paid out more than half (73%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Telenor's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

View our latest analysis for Telenor

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Telenor, with earnings per share up 2.8% on average over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past nine years, Telenor has increased its dividend at approximately 2.8% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Is Telenor worth buying for its dividend? While earnings per share have been growing slowly, Telenor is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. Bottom line: Telenor has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Telenor as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 2 warning signs for Telenor you should be aware of.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.