Telia: A Generous 8% Dividend Yield That Will Soon Be Fully Covered (OTCMKTS:TLSNF)

Introduction

Telia (OTCPK:TLSNF) (OTCPK:TLSNY) is a Swedish telecom company active in the Scandinavian and Baltic countries and Finland. Telia has been slowly improving its financial performance and although the dividend currently is not fully covered, odds are the payout ratio will drop below 100% by the end of this year as even discounting the analyst consensus estimates for 2025 by 10% indicate the free cash flow result will increase rather sharply.

As Telia reports its financial results in SEK, I will refer to the company’s main listing on the Stockholm Stock Exchange where it is listed with TELA as its ticker symbol. Considering the average daily volume in Sweden is approximately 11.5 million shares, it for sure is the most liquid listing to trade in Telia stock.

A low Q4 capex results in an outsized free cash flow performance

The company recently reported on its performance in the fourth quarter of 2023 and the entire FY 2023 performance. There weren’t really a whole lot of surprises to mention as the company’s revenue and EBITDA are gradually increasing by a single digit percentage.

In the final quarter of last year, Telia reported a total revenue of 23.1B SEK, an increase of just under 1% compared to the final quarter of 2022. However, the company was able to reduce its operating expenses by quite a bit and the EBITDA increased by just 1% solely due to the 303M SEK in ‘other operating expenses’ which weighed on the result.

Unfortunately, the company again had to record some impairment charges and that’s the sole reason why Telia reported a negative EBIT and consequently, a negative bottom line result. As the income statement above shows, the company recorded a net loss of 2.7B SEK in the fourth quarter of 2023. While that’s lower than the 18.8B SEK net loss reported in Q4 2022, the latter was caused by even higher impairment charges.

Fortunately, the company remained profitable based on its full-year results. The EBITDA increased by approximately 1% to 28.4B SEK and despite recording billions in impairment charges, the bottom line shows a positive net income of 897M SEK of which 303M SEK was attributable to the shareholders of Telia. This means that – based on the current share count of 3.93B shares – the net income was 0.077 SEK per share.

As the weak bottom line result is mainly caused by the non-cash impairment charges, I think it’s important to focus on the cash flow statement as well, as the impairment expenses are filtered out of the equation. While an impairment charge definitely is a negative element, keep in mind it is just an accounting element to reduce the value of a ‘sunk cost’ and does not impact the company’s ability to generate cash flows.

As you can see below, the company reported an operating cash flow of 31.1B SEK before changes in the working capital position and after deducting the amortization and impairment of film and program rights, the operating cash flow was approximately 25.1B SEK (excluding changes in the working capital). About 1.4B SEK came from discontinued operations so if we would deduct that from the equation, the adjusted operating cash flow would have been approximately 23.7B SEK.

We also know the total capex (excluding leases) was 15.5B SEK, which means the underlying free cash flow result was approximately 8.2B SEK. The image above shows 9.2B SEK but that’s because Telia still includes the cash flow from discontinued operations in the calculation. While that’s fair, I am erring on the side of being cautious.

The company also provides a different metric, using the ‘structural operating free cash flow’ result. As you can see below, according to that calculation, Telia reported a structural OFCF of 7.3B SEK.

Divided by the 3.93B shares outstanding, the structural free cash flow result was approximately 1.85 SEK per share. Keep in mind this excludes working capital changes and the capex spent on the acquisition of licenses.

Looking ahead to 2024 and 2025

The company has also already provided a guidance for 2024. It does expect to increase its revenue by a low single digit percentage. The EBITDA should however show a stronger growth pace as Telia is guiding for an EBITDA increase by a ‘low to mid single digit’ percentage, and that’s very encouraging. That doesn’t mean 2024 will be a cash flow rich year as the interest expenses will increase by 1B SEK while the capex (excluding the acquisition of licenses) will increase a little bit as Telia anticipates a total capex of approximately 14B SEK. On the structural OFCF level, the company anticipates a result of 7-8B SEK. Using the midpoint of that guidance, the structural free cash flow per share (excluding licenses) would be approximately 1.9 SEK/share.

Unfortunately, that means the dividend still wouldn’t be fully covered. Telia currently pays a quarterly dividend of 0.5 SEK per share, which works out to 2 SEK per share per year (the standard dividend withholding tax in Sweden is 30%). While this results in an attractive dividend yield of approximately 8% based on the current share price, I’d prefer the dividend to be covered.

Fortunately, Telia’s progress on the EBITDA level will also have a positive impact on the operating free cash flow result. The company publishes the consensus estimates for that free cash flow metric (see above). And while the estimates for 2024 as more optimistic than the company’s guidance, it is encouraging to see the analysts are expecting a high single digit CAGR in the operating free cash flow result over the next two years. Even if the 2025 estimate of 9.1B SEK would be missed by 10%, the 8.2B SEK would be sufficient to cover the dividend. So based on these assumptions, the dividend will be covered from next year on.

Investment thesis

Telia is an interesting dividend stock but I usually shy away from investing in companies where the dividend is not fully covered. Fortunately that will change in 2025 as even applying a 10% discount to the analyst expectations indicates the dividend will be fully covered.

I currently have no position in Telia, but I am keeping an eye on the company to see how the payout ratio evolves.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.