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The advice of Telephone and Data Systems, Inc. (NYSE: TDS) announced it would pay a dividend on June 30, with investors receiving $ 0.17 per share. Including this payment, the dividend yield on the share will be 2.7%, which is a modest increase in shareholder yield.
While the dividend yield is important for income investors, it is also important to consider any significant movement in the price of the shares, as this will generally outweigh any gains from distributions. Investors will be delighted to see that Telephone and Data Systems’ share price has risen 41% in the past 3 months, which is good for shareholders and may also explain a drop in dividend yield.
Check out our latest analysis for phone and data systems
The dividend of telephony and data systems is well covered by profits
While return is important, another factor to consider regarding a company’s dividend is whether current payout levels are achievable. Prior to this announcement, Telephone and Data Systems earnings easily covered the dividend, but free cash flow was negative. In general, we consider cash flow to be more important than earnings, so we would use caution when relying on the sustainability of this dividend.
Going forward, earnings per share are expected to decline 45.3% over the next year. If the dividend continues according to recent trends, we estimate the payout ratio could be 70%, which we consider to be quite comfortable, with most of the company’s earnings remaining to grow the business in the future.
Phone and data systems have a strong track record
Even over a long history of paying dividends, the company’s distributions have been remarkably stable. The first annual payment in the last 10 years was $ 0.41 in 2011, and the payment for the most recent year was $ 0.70. This works out to a compound annual growth rate (CAGR) of around 5.4% per year during that time. The dividend growth has been quite reliable so we believe this can provide investors with good additional income in their portfolio.
The dividend is expected to increase
Investors might be attracted to the stock depending on the quality of its payment history. Phone and data systems have seen BPA increase over the past five years, at 20% per year. The earnings per share are growing at a steady pace and the payout ratio is low, which in our opinion is an ideal combination in a dividend stock because the company can quite easily increase the dividend in the future.
Our thoughts on the dividend of telephony and data systems
Overall, it’s nice to see a consistent dividend payout, but we believe in the longer term the current level of payout could be unsustainable. While phone and data systems earn enough to cover payments, cash flow is lacking. Overall, we don’t think this company has the makings of a good income.
Market movements attest to the high value of a coherent dividend policy compared to a more unpredictable policy. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a business. To this end, Telephone and Data Systems has 4 warning signs (and 2 which are potentially serious) we think you should be aware of. We have also set up a list of global stocks with a solid dividend.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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