Tele2 (STO:TEL2 B) Is Due To Pay A Dividend Of SEK3.45

Tele2 AB (publ) (STO:TEL2 B) will pay a dividend of SEK3.45 on the 18th of October. This will take the annual payment to 6.5% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Tele2

Tele2 Doesn't Earn Enough To Cover Its Payments

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, the company was paying out 127% of what it was earning and 77% of cash flows. This indicates that the company could be more focused on returning cash to shareholders than reinvesting to grow the business.

Earnings per share is forecast to rise by 24.0% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 107%, which probably can't continue without putting some pressure on the balance sheet.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of SEK4.40 in 2014 to the most recent total annual payment of SEK6.90. This works out to be a compound annual growth rate (CAGR) of approximately 4.6% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Tele2 Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Tele2 has seen EPS rising for the last five years, at 43% per annum. While EPS is growing rapidly, Tele2 paid out a very high 127% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Strong earnings growth means Tele2 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.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for Tele2 that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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