Tele2 (STO:TEL2 B) Will Pay A Smaller Dividend Than Last Year

Tele2 AB (publ) (STO:TEL2 B) is reducing its dividend from last year's comparable payment to SEK3.20 on the 20th of May. However, the dividend yield of 4.9% is still a decent boost to shareholder returns.

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Tele2's Payment Could Potentially Have Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, the company's dividend was higher than its profits, and made up 76% of cash flows. While the cash payout ratio isn't necessarily a cause for concern, the company is probably focusing more on returning cash to shareholders than growing the business.

Over the next year, EPS is forecast to expand by 41.1%. If recent patterns in the dividend continues, the payout ratio in 12 months could be 89% which is a bit high but can definitely be sustainable.

View our latest analysis for Tele2

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2015, the dividend has gone from SEK4.40 total annually to SEK6.35. This works out to be a compound annual growth rate (CAGR) of approximately 3.7% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

Tele2's Dividend Might Lack Growth

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Tele2 has impressed us by growing EPS at 11% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

The Dividend Could Prove To Be Unreliable

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for Tele2 that you should be aware of before investing. Is Tele2 not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.