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Here's Why We're Wary Of Buying Tele2 AB (publ)'s (STO:TEL2 B) For Its Upcoming Dividend

Simply Wall St

It looks like Tele2 AB (publ) (STO:TEL2 B) is about to go ex-dividend in the next 3 days. You will need to purchase shares before the 23rd of August to receive the dividend, which will be paid on the 29th of August.

The upcoming dividend for Tele2 will put a total of kr6.00 per share in shareholders' pockets, up from last year's total dividends of kr4.40. 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! We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Tele2

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. Tele2 paid out a disturbingly high 260% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Tele2 generated enough free cash flow to afford its dividend. Fortunately, it paid out only 45% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Tele2 fortunately did generate enough cash to fund its dividend. 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:TEL2 B Historical Dividend Yield, August 19th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see Tele2's earnings per share have been shrinking at 4.9% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Tele2's dividend payments per share have declined at 1.3% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

From a dividend perspective, should investors buy or avoid Tele2? It's never great to see earnings per share declining, especially when a company is paying out 260% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for Tele2? See what the 19 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.