Don't Race Out To Buy Telephone and Data Systems, Inc. (NYSE:TDS) Just Because It's Going Ex-Dividend
Readers hoping to buy Telephone and Data Systems, Inc. (NYSE:TDS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Telephone and Data Systems investors that purchase the stock on or after the 14th of June will not receive the dividend, which will be paid on the 30th of June.
The company's next dividend payment will be US$0.18 per share, and in the last 12 months, the company paid a total of US$0.74 per share. Looking at the last 12 months of distributions, Telephone and Data Systems has a trailing yield of approximately 9.8% on its current stock price of $7.52. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Check out our latest analysis for Telephone and Data Systems
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. Telephone and Data Systems paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Telephone and Data Systems didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. The company paid out 93% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Telephone and Data Systems was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Telephone and Data Systems has delivered an average of 4.2% per year annual increase in its dividend, based on the past 10 years of dividend payments.
We update our analysis on Telephone and Data Systems every 24 hours, so you can always get the latest insights on its financial health, here.
The Bottom Line
Is Telephone and Data Systems worth buying for its dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in Telephone and Data Systems and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 2 warning signs for Telephone and Data Systems (1 is a bit concerning) you should be aware of.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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