Telstra Corporation Limited's (ASX:TLS) dividend will be increasing from last year's payment of the same period to A$0.085 on 22nd of September. This makes the dividend yield about the same as the industry average at 4.5%.
Telstra's Payment Has Solid Earnings Coverage
Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, Telstra's dividend made up quite a large proportion of earnings but only 50% of free cash flows. This leaves plenty of cash for reinvestment into the business.
The next year is set to see EPS grow by 39.9%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 63% which would be quite comfortable going to take the dividend forward.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the annual payment back then was A$0.28, compared to the most recent full-year payment of A$0.18. The dividend has shrunk at around 4.3% a year during that period. A company that decreases its dividend over time generally isn't what we are looking for.
The Dividend Has Limited Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Telstra's EPS has declined at around 15% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Telstra that investors should take into consideration. Is Telstra not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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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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