Solar (CPH:SOLAR B) Will Pay A Dividend Of DKK45.00

Solar A/S (CPH:SOLAR B) will pay a dividend of DKK45.00 on the 22nd of March. This means the annual payment is 7.1% of the current stock price, which is above the average for the industry.

See our latest analysis for Solar

Solar's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Solar's earnings easily covered the dividend, but free cash flows were negative. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

EPS is set to grow by 35.2% over the next year if recent trends continue. If recent patterns in the dividend continue, the payout ratio in 12 months could be 93% which is a bit high but can definitely be sustainable.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2013, the annual payment back then was DKK5.2, compared to the most recent full-year payment of DKK45.00. This works out to be a compound annual growth rate (CAGR) of approximately 24% a year over that time. Solar 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 Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Solar has grown earnings per share at 35% per year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.

Our Thoughts On Solar's Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Solar's payments, as there could be some issues with sustaining them into the future. While Solar is earning enough to cover the payments, the cash flows are lacking. We don't think Solar is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Solar has 2 warning signs (and 1 which is concerning) we think you should know about. Is Solar 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.