TalkTalk Telecom Group (LSE: TALK) announced a 15% dividend increase alongside its 2015/16 results on Thursday morning. This takes the total payout to 15.87p per share for last year. That’s equivalent to a yield of 5.9%.
The only problem is that this dividend looks increasingly unaffordable to me.
TalkTalk’s dividend payout cost the firm £135m last year. At the same time, net debt rose by £90m to £679m. I believe this increase would have been much bigger if TalkTalk hadn’t been able to raise £61m in a one-off sale of surplus shares from its Employee Share Ownership Trust.
These figures make it clear to me that a sizeable part of TalkTalk’s dividend is being funded with debt. This has been the case for several years, in my opinion. This is one reason why the company’s net debt is now a whopping 8.6 times last year’s adjusted post-tax profits.
Adjusted earnings per share are expected to rise by 58% to 14.6p in 2016/17. TalkTalk said on Thursday that it expects to free cash flow to cover the dividend this year. The firm has been investing in new services, so these gains may be possible.
However, even if TalkTalk does deliver on forecasts, the stock’s 2017 forecast P/E of 18 looks expensive to me. I think there’s better value elsewhere.
Can this mining giant beat the odds?
Indian mining giant Vedanta Resources (LSE: VED) has cut its dividend by 52% to 30 cents per share after unveiling a full-year loss of $1.8bn. The firm’s revenue fell by 17% to $10.7bn last year, while earnings before interest, tax, depreciation and amortisation fell by 38% to $2.3bn.
The reduced dividend still provides an attractive yield of 5.5%, although shareholders who bought at higher prices may be disappointed. There was some good news, however. Vedanta was able to reduce its net debt by $1.1bn to $7.3bn, thanks to free cash flow of $1.7bn.
The problem is that the firm’s debt commitments remain massive. Vedanta made interest payments of $1.2bn last year. That’s more than 10% of its revenue. While debt remains high, the shares are fundamentally risky. That’s why I’m not convinced the dividend is safe, even though this year’s dividend payout will cost the firm just $83m.
More trouble may lie ahead
Shares in construction and support services firm Interserve (LSE: IRV) fell by 23% in one day last week after the firm warned it would have to take a £70m cash impairment on a project in Glasgow.
Interserve didn’t provide any updated profit or dividend guidance in its statement. This seems to have left City analysts uncertain about whether to cut their forecasts. Consensus forecasts for earnings and dividends published by Reuters have so far remain unchanged. These estimates suggest that Interserve now trades on a 2016 forecast P/E of just 4.8 and offers a prospective dividend yield of 8%!
Given that Interserve has already warned net debt will rise by £35m as a result of the £70m charge, I believe a dividend cut is a significant risk. I’d be tempted to wait until the picture is a little clearer before considering an investment.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.