Could Jaeren Sparebank (OB:JAEREN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
In this case, Jaerenrebank likely looks attractive to dividend investors, given its 5.6% dividend yield and four-year payment history. We’d agree the yield does look enticing. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. In the last year, Jaerenrebank paid out 55% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Jaerenrebank has been paying a dividend for the past four years. This company’s dividend has been unstable, and with a relatively short history, we think it’s a little soon to draw strong conclusions about its long term dividend potential. During the past four-year period, the first annual payment was kr5.00 in 2015, compared to kr7.50 last year. Dividends per share have grown at approximately 11% per year over this time. The dividends haven’t grown at precisely 11% every year, but this is a useful way to average out the historical rate of growth.
So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Over the past three years, it looks as though Jaerenrebank’s EPS have declined at around 17% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Jaerenrebank’s earnings per share, which support the dividend, have been anything but stable.
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. Jaerenrebank’s payout ratio is within an average range for most market participants. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. With this information in mind, we think Jaerenrebank may not be an ideal dividend stock.
See if management have their own wealth at stake, by checking insider shareholdings in Jaerenrebank stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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