Is G8 Education Ltd still a dividend darling?

It’s like a horse race – in the Blue we have up-and-comer G8 Education Ltd (ASX: GEM) and in the Red we have ageing nag Telstra Corporation Ltd (ASX: TLS). Both are – or were –favourites among income seeking investors for their huge dividends, historically above 6% at recent share prices. Both announced a cut to the dividend at their recent results in August. The difference in performance couldn’t be more stark:

Telstra (red) vs G8 Education (blue) over the last 6 months. source: Google Finance

Just like Coles grocery prices, Telstra shares have headed Down Down and G8 is on a tear. The key differences are size, debt, and potential for growth. Telstra is 40x G8’s size, carries heaps more debt, and is not expected to grow much, if at all.

G8 recently lowered its debt levels substantially via another capital raising and, although a titan in its industry, is still small enough that it can grow incrementally by acquiring more child care centres here and there. Occupancy at the company’s centres has fallen in recent times, and management has previously stated that competition was increasing, which didn’t bode well for profits and were a key reason the dividend was cut. Recently, management stated that occupancy had improved compared to the same time last year, and while the situation could be improving, investors will want to check that it didn’t come at the cost of lower fees.

I sold my G8 shares last year due to debt concerns and a feeling that the company was expanding at the cost of stability, which is not what you want in a dividend share. However, a recent company review determined that a lower level of debt would be more appropriate, and I think that G8 could again be of some interest as an income stock.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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