Today we’ll take a closer look at Ringkjøbing Landbobank A/S (CPH:RILBA) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With a 2.0% yield and a nine-year payment history, investors probably think Ringkjøbing Landbobank looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.
Explore this interactive chart for our latest analysis on Ringkjøbing Landbobank!
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 37% of Ringkjøbing Landbobank’s profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
We update our data on Ringkjøbing Landbobank every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The first recorded dividend for Ringkjøbing Landbobank, in the last decade, was nine years ago. Its dividend has not fluctuated much that time, which we like, but we’re conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past nine-year period, the first annual payment was ø2.40 in 2011, compared to ø10.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time.
Ringkjøbing Landbobank has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It’s good to see Ringkjøbing Landbobank has been growing its earnings per share at 13% a year over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.
Conclusion
To summarise, shareholders should always check that Ringkjøbing Landbobank’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Ringkjøbing Landbobank has a low and conservative payout ratio. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Overall we think Ringkjøbing Landbobank is an interesting dividend stock, although it could be better.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 Ringkjøbing Landbobank analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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