Why It Might Not Make Sense To Buy Telstra Group Limited (ASX:TLS) For Its Upcoming Dividend
Readers hoping to buy Telstra Group Limited (ASX:TLS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Telstra Group's shares on or after the 26th of August will not receive the dividend, which will be paid on the 24th of September.
The company's upcoming dividend is AU$0.105 a share, following on from the last 12 months, when the company distributed a total of AU$0.21 per share to shareholders. Based on the last year's worth of payments, Telstra Group stock has a trailing yield of around 4.5% on the current share price of AU$4.71. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Telstra Group has been able to grow its dividends, or if the dividend might be cut.
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. Last year Telstra Group paid out 106% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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 62% of its free cash flow as dividends, within the usual range for most companies.
It's good to see that while Telstra Group'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.
View our latest analysis for Telstra Group
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Telstra Group, with earnings per share up 5.3% on average over the last five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Telstra Group has seen its dividend decline 3.8% per annum on average over the past 10 years, which is not great to see. Telstra Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
Final Takeaway
Is Telstra Group worth buying for its dividend? While earnings per share have been growing slowly, Telstra Group is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Telstra Group. To help with this, we've discovered 2 warning signs for Telstra Group that you should be aware of before investing in their shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.