Deutsche Telekom AG: A Dividend Powerhouse Before It Goes Ex-Dividend

In the ever-evolving landscape of telecommunications, Deutsche Telekom AG (ETR:DTE) stands out as a beacon of stability and reliability, particularly for income-seeking investors. With a strong dividend yield and a commitment to shareholder returns, Deutsche Telekom is poised to continue its tradition of rewarding investors. As the company approaches its ex-dividend date, it's crucial for investors to understand the nuances of its dividend policy and the underlying financial health that supports it.



The Allure of Deutsche Telekom's Dividend Policy

Deutsche Telekom's dividend policy is designed to provide a steady stream of income for its shareholders. The company aims to pay out 40 to 60 percent of its adjusted sustainable earnings per share (EPS) as dividends each year. For the fiscal year 2023, Deutsche Telekom plans to increase its dividend by 10 percent to €0.77 from €0.70 the previous year. This increase is supported by guidance for earnings per share of over €1.60 for 2023, placing the proposed dividend in the middle of the intended payout range.



Financial Metrics and Performance Indicators

When evaluating Deutsche Telekom's dividend sustainability and growth potential, several key financial metrics and performance indicators stand out:

1. Dividend Yield and Payout Ratio:
- Deutsche Telekom offers a strong dividend yield with high reliability. The dividend payout ratio for 2022 was 46%, which is within the company's target range of 40 to 60 percent of adjusted sustainable EPS. This indicates a balanced approach to dividend distribution and earnings retention.

2. Dividend Cover:
- The dividend cover for Deutsche Telekom is approximately 0.9, meaning the dividend is almost fully covered by the company's earnings. This suggests that the dividend is sustainable, as the company's earnings are sufficient to support the dividend payments.

3. Dividend Growth:
- Deutsche Telekom has a history of increasing its dividends. For example, the dividend per share increased from €0.60 in 2020 to €0.70 in 2022. The company's dividend policy provides a framework for consistent dividend growth.

4. Earnings Per Share (EPS):
- The company's EPS is a critical indicator of its financial health and dividend sustainability. For the fiscal year 2023, Deutsche Telekom expects EPS to be over €1.60. Analysts' consensus for future EPS and dividends per share is as follows:
- Q3FY23: EPS €0.44, Dividend €0.77
- FY24: EPS €1.65, Dividend €0.85
- FY25: EPS €1.82, Dividend €0.93
- FY26: EPS €2.06, Dividend €1.02
- FY27: EPS €2.27, Dividend €1.12
- This data suggests a positive outlook for earnings growth, which supports the sustainability and growth of the dividend.

5. Share Buybacks:
- In addition to dividends, Deutsche Telekom plans to buy back shares in 2024 for up to a total of €2 billion. This share buyback program is intended to recoup part of the dilution effect from the 2021 capital increase, which was made to acquire T-Mobile US shares from Softbank. Share buybacks can enhance shareholder value by reducing the number of outstanding shares and increasing earnings per share.

6. Tax-Free Dividends:
- Dividends paid to shareholders in Germany are not subject to taxation, as they are paid from the tax contribution account in accordance with § 27 of the Corporation Tax Act (KStG). This tax advantage makes Deutsche Telekom's dividends more attractive to German investors.

7. Market Performance:
- Deutsche Telekom's total shareholder return, including dividend payments, is updated once per year and is available for 1-year, 3-year, 5-year, and 10-year periods. This data provides insights into the company's historical performance and can help investors assess its potential for future growth.

8. Analyst Consensus:
- Deutsche Telekom compiles a consensus for the upcoming results and future years once a quarter. This consensus provides insights into analysts' expectations for the company's financial performance and dividend growth.

Red Flags to Watch

While Deutsche Telekom's dividend policy and financial metrics are impressive, investors should be aware of potential red flags. The company's dividend cover of 0.9 indicates that the dividend is almost fully covered by earnings, but any significant decline in earnings could put pressure on the dividend. Additionally, the company's share buyback program, while beneficial for shareholders, could impact its cash flow and financial flexibility.

Alternatives if Rates Rise

In a rising-rate environment, investors may need to consider alternatives to Deutsche Telekom. Other telecommunications companies, such as Vodafone and Liberty Global, are undergoing significant restructuring, which could impact their dividend policies. Investors should also consider diversifying their portfolios with other high-yield sectors, such as utilities and real estate investment trusts (REITs).

Conclusion

Deutsche Telekom AG's dividend policy and financial metrics make it an attractive option for income-seeking investors. With a strong dividend yield, consistent dividend growth, and a commitment to shareholder returns, Deutsche Telekom is well-positioned to continue rewarding its shareholders. However, investors should be aware of potential red flags and consider alternatives in a rising-rate environment. As Deutsche Telekom approaches its ex-dividend date, now is the time for investors to evaluate the company's dividend sustainability and growth potential.