The board of United Internet AG (ETR:UTDI) has announced that it will pay a dividend on the 23rd of May, with investors receiving €0.50 per share. The dividend yield is 2.3% based on this payment, which is a little bit low compared to the other companies in the industry.

See our latest analysis for United Internet

United Internet's Payment Has Solid Earnings Coverage

Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, United Internet's dividend was only 37% of earnings, however it was paying out 282% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Looking forward, earnings per share is forecast to rise by 85.4% over the next year. If the dividend continues on this path, the payout ratio could be 20% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the dividend has gone from €0.40 total annually to €0.50. This implies that the company grew its distributions at a yearly rate of about 2.3% over that duration. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

United Internet Could Grow Its Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that United Internet has been growing its earnings per share at 7.4% a year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for United Internet's prospects of growing its dividend payments in the future.

In Summary

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While United Internet is earning enough to cover the payments, the cash flows are lacking. We don't think United Internet is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 3 warning signs for United Internet that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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