October 20, 2021

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We Wouldn’t Be Too Quick To Buy Telia Company AB (publ) (STO:TELIA) Before It Goes Ex-Dividend

Telia Company AB (publ) (STO:TELIA) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 3rd of April, you won’t be eligible to receive this dividend, when it is paid on the 9th of April.

Telia Company’s upcoming dividend is kr0.90 a share, following on from the last 12 months, when the company distributed a total of kr1.80 per share to shareholders. Based on the last year’s worth of payments, Telia Company stock has a trailing yield of around 5.2% on the current share price of SEK34.56. 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 investigate whether Telia Company can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Telia Company

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. Last year, Telia Company paid out 101% of its income as dividends, which is above a level that we’re comfortable with, especially if the company needs to reinvest in its business. 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. Over the last year, it paid out more than three-quarters (80%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

OM:TELIA Historical Dividend Yield March 29th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Telia Company’s earnings per share have fallen at approximately 7.1% 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.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Telia Company has seen its dividend decline 2.2% per annum on average over the past ten years, which is not great to see. 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 Telia Company for the upcoming dividend? It’s never fun to see a company’s earnings per share in retreat. Worse, Telia Company’s paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it’s not a good combination. It’s not the most attractive proposition from a dividend perspective, and we’d probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Telia Company don’t faze you, it’s worth being mindful of the risks involved with this business. Case in point: We’ve spotted 2 warning signs for Telia Company you should be aware of.

If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at [email protected] 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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