Arion banki hf's (ICE:ARION) Dividend Will Be Increased To Kr15.00

Arion banki hf. (ICE:ARION) has announced that it will be increasing its dividend on the 24th of March to Kr15.00. This will take the annual payment from 8.4% to 8.4% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for Arion banki hf

Arion banki hf's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Arion banki hf was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. Generally, we think that this would be a risky long term practice.

EPS is set to fall by 7.1% over the next 12 months. If recent patterns in the dividend continue, we could see the payout ratio reaching 89% in the next 12 months, which is on the higher end of the range we would say is sustainable.

Arion banki hf's Dividend Has Lacked Consistency

Looking back, the company hasn't been paying the most consistent dividend, but with such a short dividend history it could be too early to draw solid conclusions. The dividend has gone from Kr5.00 in 2019 to the most recent annual payment of Kr15.00. This works out to be a compound annual growth rate (CAGR) of approximately 44% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth Could Be Constrained

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Arion banki hf has seen EPS rising for the last five years, at 11% per annum. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.

Arion banki hf's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Arion banki hf will make a great income stock. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 2 warning signs for Arion banki hf (1 is concerning!) that you should be aware of before investing. Is Arion banki hf not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.