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

Tele2 AB (publ)'s (STO:TEL2 B) dividend is being reduced from last year's payment covering the same period to SEK3.20 on the 20th of May. However, the dividend yield of 4.6% is still a decent boost to shareholder returns.

We've discovered 2 warning signs about Tele2. View them for free.

Tele2's Payment Could Potentially Have Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, Tele2's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Earnings per share is forecast to rise by 36.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 90%, which is on the higher side, but certainly still feasible.

View our latest analysis for Tele2

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was SEK4.85 in 2015, and the most recent fiscal year payment was SEK6.35. This works out to be a compound annual growth rate (CAGR) of approximately 2.7% 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 May Have Challenges Growing The Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Tele2 has been growing its earnings per share at 9.8% a year over the past five years. However, the company isn't reinvesting a lot back into the business, so we would expect the growth rate to slow down somewhat in the future.

Our Thoughts On Tele2's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

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. Taking the debate a bit further, we've identified 2 warning signs for Tele2 that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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