Dividend paying stocks like Aegon N.V. (AMS:AGN) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
In this case, Aegon likely looks attractive to dividend investors, given its 3.9% dividend yield and nine-year payment history. It sure looks interesting on these metrics - but there's always more to the story. The company also bought back stock equivalent to around 19% of market capitalisation this year. That said, the recent jump in the share price will make Aegon's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Aegon paid out 14% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.
Consider getting our latest analysis on Aegon's financial position here.
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 last decade of data, we can see that Aegon paid its first dividend at least nine years ago. It's good to see that Aegon 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 nine-year period, the first annual payment was €0.2 in 2011, compared to €0.1 last year. The dividend has shrunk at around 5.5% a year during that period. Aegon's dividend has been cut sharply at least once, so it hasn't fallen by 5.5% every year, but this is a decent approximation of the long term change.
A shrinking dividend over a nine-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Earnings have grown at around 7.4% a year for the past five years, which is better than seeing them shrink! A low payout ratio and strong historical earnings growth suggests Aegon has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.
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. Firstly, we like that Aegon has a low and conservative payout ratio. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In summary, we're unenthused by Aegon as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 4 warning signs for Aegon (of which 1 makes us a bit uncomfortable!) you should know about.
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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