Telia Company AB (publ) (STO:TELIA) will increase its dividend on the 2nd of November to kr1.00. This will take the dividend yield from 5.4% to 7.1%, providing a nice boost to shareholder returns.
Telia Company Might Find It Hard To Continue The Dividend
A big dividend yield for a few years doesn't mean much if it can't be sustained. Even though Telia Company isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. We generally think that cash flow is more important than accounting measures of profit, so we are fairly comfortable with the dividend at this level.
Looking forward, earnings per share could 46.8% over the next year if the trend of the last few years can't be broken. This means that the company will be unprofitable, but cash flows are more important when considering the dividend and as the current cash payout ratio is pretty healthy, we don't think there is too much reason to worry.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was kr2.75 in 2011, and the most recent fiscal year payment was kr2.00. Doing the maths, this is a decline of about 3.1% per year. A company that decreases its dividend over time generally isn't what we are looking for.
Dividend Growth Potential Is Shaky
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. Over the past five years, it looks as though Telia Company's EPS has declined at around 47% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.
Telia Company's Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think Telia Company will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Telia Company is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Telia Company has 4 warning signs (and 2 which are significant) we think you should know about. We have also put together a list of global stocks with a solid dividend.
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