Could Lillestrøm Sparebank (OB:LSTSB-ME) 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 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.
Some readers mightn’t know much about Lillestrømrebank’s 7.0% dividend, as it has only been paying distributions for a year or so. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.
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Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Lillestrømrebank paid out 12% of its profit as dividends, over the trailing twelve month period. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Dividend Volatility
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. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. This works out to a decline of approximately 13% over that time.
A shrinking dividend over a one-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
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Lillestrømrebank’s earnings per share are down -6.6% over the past year. While this is not ideal, one year is a short time in business, and we wouldn’t want to get too hung up on this. We do note though, one year is too short a time to be drawing strong conclusions about a company’s future prospects.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Lillestrømrebank has a low and conservative payout ratio. Unfortunately, there hasn’t been any earnings growth, and the company’s dividend history has been too short for us to evaluate the consistency of the dividend. In summary, we’re unenthused by Lillestrømrebank 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.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Lillestrømrebank stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.