Stock Analysis

Do These 3 Checks Before Buying Reitir fasteignafélag hf. (ICE:REITIR) For Its Upcoming Dividend

ICSE:REITIR
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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Reitir fasteignafélag hf. (ICE:REITIR) is about to go ex-dividend in just three days. You will need to purchase shares before the 12th of March to receive the dividend, which will be paid on the 10th of June.

Reitir fasteignafélag hf's next dividend payment will be Kr1.00 per share. Last year, in total, the company distributed Kr1.65 to shareholders. Based on the last year's worth of payments, Reitir fasteignafélag hf stock has a trailing yield of around 2.5% on the current share price of ISK64.9. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Reitir fasteignafélag hf

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. An unusually high payout ratio of 251% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Reitir fasteignafélag hf generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 29% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Reitir fasteignafélag hf's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Reitir fasteignafélag hf paid out over the last 12 months.

historic-dividend
ICSE:REITIR Historic Dividend March 8th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Reitir fasteignafélag hf's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 35% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Reitir fasteignafélag hf has delivered 3.3% dividend growth per year on average over the past five years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Reitir fasteignafélag hf is already paying out 251% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

From a dividend perspective, should investors buy or avoid Reitir fasteignafélag hf? It's not a great combination to see a company with earnings in decline and paying out 251% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Reitir fasteignafélag hf.

With that in mind though, if the poor dividend characteristics of Reitir fasteignafélag hf don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Reitir fasteignafélag hf is showing 6 warning signs in our investment analysis, and 2 of those are a bit concerning...

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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