Telia Company AB (publ) (STO:TELIA) stock is about to trade ex-dividend in 3 days. If you purchase the stock on or after the 22nd of October, you won't be eligible to receive this dividend, when it is paid on the 28th of October.
Telia Company's next dividend payment will be kr0.90 per share, on the back of last year when the company paid a total of kr2.45 to shareholders. Last year's total dividend payments show that Telia Company has a trailing yield of 6.4% on the current share price of SEK38.47. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Telia Company can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Telia Company paid out a disturbingly high 338% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 71% of its free cash flow as dividends, within the usual range for most companies.
It's good to see that while Telia Company's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Telia Company's earnings per share have dropped 22% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Telia Company has delivered an average of 0.9% per year annual increase in its dividend, based on the past 10 years of dividend payments.
The Bottom Line
Is Telia Company an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. What's more, Telia Company is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think Telia Company is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in Telia Company despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 3 warning signs for Telia Company that we recommend you consider before investing in the business.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. 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.
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