Tele2's (STO:TEL2 B) Dividend Will Be Increased To SEK3.40

Tele2 AB (publ) (STO:TEL2 B) has announced that it will be increasing its dividend from last year's comparable payment on the 13th of October to SEK3.40. This will take the annual payment to 9.0% 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

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, the company was paying out 129% of what it was earning and 88% of cash flows. The company could be more focused on returning cash to shareholders, but this could indicate that growth opportunities are few and far between.

Over the next year, EPS is forecast to expand by 22.2%. If the dividend continues on its recent course, the payout ratio in 12 months could be 107%, which is a bit high and could start applying pressure to 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. Since 2013, the dividend has gone from SEK7.10 total annually to SEK6.80. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Tele2 May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. However, Tele2 has only grown its earnings per share at 2.0% per annum over the past five years. The earnings growth is anaemic, and the company is paying out 129% of its profit. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

Tele2's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments are bit high to be considered sustainable, and the track record isn't the best. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 3 warning signs for Tele2 that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield 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.