Neste Oyj's (HEL:NESTE) Shareholders Will Receive A Bigger Dividend Than Last Year

Neste Oyj (HEL:NESTE) will increase its dividend on the 7th of October to €0.41. Despite this raise, the dividend yield of 1.9% is only a modest boost to shareholder returns.

Check out our latest analysis for Neste Oyj

Neste Oyj's Payment Has Solid Earnings Coverage

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Based on the last payment, Neste Oyj was paying only paying out a fraction of earnings, but the payment was a massive 126% of cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Looking forward, earnings per share is forecast to fall by 12.2% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could be 41%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Neste Oyj Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the first annual payment was €0.12, compared to the most recent full-year payment of €0.82. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Neste Oyj has seen EPS rising for the last five years, at 17% per annum. Neste Oyj definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Our Thoughts On Neste Oyj's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Neste Oyj's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Taking the debate a bit further, we've identified 1 warning sign for Neste Oyj that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield 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.