Erste Group Bank (VIE:EBS) Will Pay A Larger Dividend Than Last Year At €1.60

The board of Erste Group Bank AG (VIE:EBS) has announced that it will be increasing its dividend on the 25th of May to €1.60. This makes the dividend yield 8.1%, which is above the industry average.

View our latest analysis for Erste Group Bank

Erste Group Bank's Earnings Easily Cover the Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, Erste Group Bank was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Over the next year, EPS is forecast to expand by 0.09%. Assuming the dividend continues along recent trends, we think the payout ratio could be 68% by next year, which is in a pretty sustainable range.

Erste Group Bank's Dividend Has Lacked Consistency

It's comforting to see that Erste Group Bank has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2013, the first annual payment was €0.40, compared to the most recent full-year payment of €1.60. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. Erste Group Bank has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Has Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Erste Group Bank has seen EPS rising for the last five years, at 8.4% per annum. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Erste Group Bank will make a great income stock. While Erste Group Bank is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, Erste Group Bank has 3 warning signs (and 1 which can't be ignored) we think you should know about. Is Erste Group Bank not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.