Is Telefónica SA (BME:TEF) A Smart Choice For Dividend Investors?

Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Telefónica SA (BME:TEF) has been paying a dividend to shareholders. Today it yields 5.2%. Does Telefónica tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

See our latest analysis for Telefónica

5 checks you should use to assess a dividend stock

If you are a dividend investor, you should always assess these five key metrics:

• Is it the top 25% annual dividend yield payer?

• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?

• Has dividend per share amount increased over the past?

• Is is able to pay the current rate of dividends from its earnings?

• Will it have the ability to keep paying its dividends going forward?

BME:TEF Historical Dividend Yield November 28th 18

How well does Telefónica fit our criteria?

The current trailing twelve-month payout ratio for the stock is 73%, which means that the dividend is covered by earnings. In the near future, analysts are predicting lower payout ratio of 55%, leading to a dividend yield of around 5.3%. However, EPS should increase to €0.74, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Dividend payments from Telefónica have been volatile in the past 10 years, with some years experiencing significant drops of over 25%. These characteristics do not bode well for income investors seeking reliable stream of dividends.

Relative to peers, Telefónica has a yield of 5.2%, which is high for Telecom stocks.

Next Steps:

Considering the dividend attributes we analyzed above, Telefónica is definitely worth keeping an eye on for someone looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three relevant factors you should further examine:

1. Future Outlook: What are well-informed industry analysts predicting for TEF’s future growth? Take a look at our free research report of analyst consensus for TEF’s outlook.

2. Valuation: What is TEF worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether TEF is currently mispriced by the market.

3. Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.