Stock Analysis

Do These 3 Checks Before Buying TeleMasters Holdings Limited (JSE:TLM) For Its Upcoming Dividend

JSE:TLM
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TeleMasters Holdings Limited (JSE:TLM) stock is about to trade ex-dividend in 4 days. Ex-dividend means that investors that purchase the stock on or after the 29th of December will not receive this dividend, which will be paid on the 4th of January.

TeleMasters Holdings's upcoming dividend is R0.016 a share, following on from the last 12 months, when the company distributed a total of R0.061 per share to shareholders. Last year's total dividend payments show that TeleMasters Holdings has a trailing yield of 4.1% on the current share price of ZAR1.49. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for TeleMasters Holdings

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. An unusually high payout ratio of 235% of its profit suggests something is happening other than the usual distribution of profits to shareholders. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 26% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while TeleMasters Holdings'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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit TeleMasters Holdings paid out over the last 12 months.

historic-dividend
JSE:TLM Historic Dividend December 24th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. TeleMasters Holdings's earnings per share have fallen at approximately 17% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. TeleMasters Holdings's dividend payments per share have declined at 9.2% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Should investors buy TeleMasters Holdings for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 235% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in TeleMasters Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of TeleMasters Holdings.

With that being said, if you're still considering TeleMasters Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 6 warning signs for TeleMasters Holdings (of which 2 shouldn't be ignored!) you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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