Is aktsiaselts Linda Nektar's (TAL:LINDA) 1.3% Dividend Sustainable?

Dividend paying stocks like aktsiaselts Linda Nektar (TAL:LINDA) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Investors might not know much about aktsiaselts Linda Nektar's dividend prospects, even though it has been paying dividends for the last five years and offers a 1.3% yield. A 1.3% yield is not inspiring, but the longer payment history has some appeal. There are a few simple ways to reduce the risks of buying aktsiaselts Linda Nektar for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on aktsiaselts Linda Nektar!

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 240% of aktsiaselts Linda Nektar's profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. aktsiaselts Linda Nektar paid out 163% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Cash is slightly more important than profit from a dividend perspective, but given aktsiaselts Linda Nektar's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

With a strong net cash balance, aktsiaselts Linda Nektar investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of aktsiaselts Linda Nektar's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. aktsiaselts Linda Nektar has been paying a dividend for the past five years. During the past five-year period, the first annual payment was €0.09 in 2016, compared to €0.1 last year. Dividends per share have grown at approximately 2.1% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

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. aktsiaselts Linda Nektar's earnings per share have shrunk at 32% 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 aktsiaselts Linda Nektar'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 a bit uncomfortable with aktsiaselts Linda Nektar paying out a high percentage of both its cashflow and earnings. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Using these criteria, aktsiaselts Linda Nektar looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come accross 3 warning signs for aktsiaselts Linda Nektar you should be aware of, and 1 of them doesn't sit too well with us.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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