Three Things You Should Check Before Buying Sjóvá-Almennar tryggingar hf. (ICE:SJOVA) For Its Dividend

Today we'll take a closer look at Sjóvá-Almennar tryggingar hf. (ICE:SJOVA) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

With a six-year payment history and a 5.2% yield, many investors probably find Sjóvá-Almennar tryggingar hf intriguing. It sure looks interesting on these metrics - but there's always more to the story. During the year, the company also conducted a buyback equivalent to around 1.7% of its market capitalisation. That said, the recent jump in the share price will make Sjóvá-Almennar tryggingar hf's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding Sjóvá-Almennar tryggingar hf for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Sjóvá-Almennar tryggingar hf paid out 61% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Consider getting our latest analysis on Sjóvá-Almennar tryggingar hf's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the data, we can see that Sjóvá-Almennar tryggingar hf has been paying a dividend for the past six years. It's good to see that Sjóvá-Almennar tryggingar hf has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was Kr2.5 in 2014, compared to Kr1.4 last year. This works out to be a decline of approximately 8.8% per year over that time. Sjóvá-Almennar tryggingar hf's dividend has been cut sharply at least once, so it hasn't fallen by 8.8% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. It's good to see Sjóvá-Almennar tryggingar hf has been growing its earnings per share at 29% a year over the past five years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that Sjóvá-Almennar tryggingar hf's growth will be slower in the future.

Conclusion

To summarise, shareholders should always check that Sjóvá-Almennar tryggingar hf's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Sjóvá-Almennar tryggingar hf has an acceptable payout ratio. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Sjóvá-Almennar tryggingar hf might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs for Sjóvá-Almennar tryggingar hf that investors should take into consideration.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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