Tele2's (STO:TEL2 B) Dividend Will Be Increased To SEK3.45

The board of Tele2 AB (publ) (STO:TEL2 B) has announced that it will be paying its dividend of SEK3.45 on the 22nd of May, an increased payment from last year's comparable dividend. This makes the dividend yield 7.7%, which is above the industry average.

View our latest analysis for Tele2

Tele2 Doesn't Earn Enough To Cover Its Payments

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, the company's dividend was higher than its profits, and made up 80% 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.

The next 12 months is set to see EPS grow by 16.4%. If the dividend continues on its recent course, the payout ratio in 12 months could be 112%, which is a bit high and could start applying pressure to the balance sheet.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of SEK7.10 in 2014 to the most recent total annual payment of SEK6.90. Payments have been decreasing at a very slow pace in this time period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Tele2 has impressed us by growing EPS at 24% per year over the past five years. Although earnings per share is up nicely Tele2 is paying out 128% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Tele2 will make a great income stock. 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. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 3 warning signs for Tele2 that investors need to be conscious of moving forward. Is Tele2 not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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