Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Telefónica Deutschland Holding AG (ETR:O2D) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 21st of May, you won't be eligible to receive this dividend, when it is paid on the 26th of May.
Telefónica Deutschland Holding's next dividend payment will be €0.17 per share. Last year, in total, the company distributed €0.17 to shareholders. Based on the last year's worth of payments, Telefónica Deutschland Holding stock has a trailing yield of around 6.3% on the current share price of €2.697. 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.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Telefónica Deutschland Holding 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. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Telefónica Deutschland Holding 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. Over the last year, it paid out more than three-quarters (77%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. Telefónica Deutschland Holding was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Telefónica Deutschland Holding's dividend payments per share have declined at 13% per year on average over the past seven years, which is uninspiring.
The Bottom Line
Should investors buy Telefónica Deutschland Holding for the upcoming dividend? It's hard to get used to Telefónica Deutschland Holding paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. All things considered, we are not particularly enthused about Telefónica Deutschland Holding from a dividend perspective.
If you're not too concerned about Telefónica Deutschland Holding's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Our analysis shows 2 warning signs for Telefónica Deutschland Holding that we strongly recommend you have a look at before investing in the company.
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@example.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.
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