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TPG Telecom Limited (ASX:TPG) has announced that it will be increasing its dividend on the 13th of April to AU$0.085. Despite this raise, the dividend yield of 3.0% is only a modest boost to shareholder returns.
TPG Telecom Doesn't Earn Enough To Cover Its Payments
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Based on the last payment, TPG Telecom's profits didn't cover the dividend, but the company was generating enough cash instead. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.
Over the next year, EPS is forecast to expand by 61.7%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 172%, which probably can't continue putting some pressure on the balance sheet.
TPG Telecom Doesn't Have A Long Payment History
It's not possible for us to make a backward looking judgement just based on a short payment history. This doesn't mean that the company can't pay a good dividend, but just that we want to wait until it can prove itself.
TPG Telecom's Dividend Might Lack Growth
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. We are encouraged to see that TPG Telecom has grown earnings per share at 44% per year over the past five years. Although earnings per share is up nicely TPG Telecom is paying out 279% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think TPG Telecom is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 3 warning signs for TPG Telecom that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated 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.