Looking For Steady Income For Your Dividend Portfolio? Is NORMA Group SE (ETR:NOEJ) A Good Fit?

Dividend paying stocks like NORMA Group SE (ETR:NOEJ) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

With a 1.8% yield and a nine-year payment history, investors probably think NORMA Group looks like a reliable dividend stock. A 1.8% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying NORMA Group for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on NORMA Group!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. NORMA Group paid out 393% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. NORMA Group's cash payout ratio last year was 1.4%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and NORMA Group fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

We update our data on NORMA Group every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. The first recorded dividend for NORMA Group, in the last decade, was nine years ago. It's good to see that NORMA Group has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was €0.6 in 2012, compared to €0.7 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.7% a year over that time. NORMA Group's dividend payments have fluctuated, so it hasn't grown 1.7% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. NORMA Group's earnings per share have shrunk at 40% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and NORMA Group's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that NORMA Group paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, NORMA Group has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

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. For example, we've identified 3 warning signs for NORMA Group (1 is potentially serious!) that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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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. 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.
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