The board of Telephone and Data Systems, Inc. (NYSE:TDS) has announced that it will pay a dividend on the 30th of June, with investors receiving US$0.17 per share. Including this payment, the dividend yield on the stock will be 2.7%, which is a modest boost for shareholders' returns.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Telephone and Data Systems' stock price has increased by 41% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.
Telephone and Data Systems' Dividend Is Well Covered By Earnings
While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, Telephone and Data Systems' earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Looking forward, earnings per share is forecast to fall by 45.3% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could be 70%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.
Telephone and Data Systems Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was US$0.41 in 2011, and the most recent fiscal year payment was US$0.70. This works out to be a compound annual growth rate (CAGR) of approximately 5.4% a year over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.
The Dividend Looks Likely To Grow
Investors could be attracted to the stock based on the quality of its payment history. Telephone and Data Systems has seen EPS rising for the last five years, at 20% per annum. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.
Our Thoughts On Telephone and Data Systems' Dividend
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While Telephone and Data Systems is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.
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. To that end, Telephone and Data Systems has 4 warning signs (and 2 which are potentially serious) we think you should know about. We have also put together a list of global stocks with a solid dividend.
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