Readers hoping to buy Scandinavian Tobacco Group A/S (CPH:STG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 15th of April, you won't be eligible to receive this dividend, when it is paid on the 19th of April.
Scandinavian Tobacco Group's next dividend payment will be kr.6.50 per share. Last year, in total, the company distributed kr.6.50 to shareholders. Calculating the last year's worth of payments shows that Scandinavian Tobacco Group has a trailing yield of 5.1% on the current share price of DKK128.3. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Scandinavian Tobacco Group paid out 95% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 44% of its free cash flow in the past year.
It's good to see that while Scandinavian Tobacco Group's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Scandinavian Tobacco Group's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Scandinavian Tobacco Group has delivered 5.4% dividend growth per year on average over the past five years.
From a dividend perspective, should investors buy or avoid Scandinavian Tobacco Group? Scandinavian Tobacco Group's earnings per share are effectively flat, and it is paying out just 44% of its cash flow but 95% of its income. In summary, while it has some positive characteristics, we're not inclined to race out and buy Scandinavian Tobacco Group today.
However if you're still interested in Scandinavian Tobacco Group as a potential investment, you should definitely consider some of the risks involved with Scandinavian Tobacco Group. Case in point: We've spotted 2 warning signs for Scandinavian Tobacco Group you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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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