Why Lillestrøm Sparebank (OB:LSTSB) Is A Top Dividend Stock

Today we'll take a closer look at Lillestrøm Sparebank (OB:LSTSB) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Lillestrøm Sparebank pays a 6.3% dividend yield, and has been paying dividends for the past three years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple analysis can reduce the risk of holding Lillestrøm Sparebank for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Lillestrøm Sparebank!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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. Lillestrøm Sparebank paid out 9.2% 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.

We update our data on Lillestrøm Sparebank every 24 hours, so you can always get our latest analysis of its financial health, here.

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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past three-year period, the first annual payment was kr8.5 in 2018, compared to kr8.4 last year. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame.

We struggle to make a case for buying Lillestrøm Sparebank for its dividend, given that payments have shrunk over the past three years.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Lillestrøm Sparebank has grown its EPS 295% over the past 12 months. We're glad to see EPS up on last year, but we're conscious that growth rates typically slow as companies increase in size. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly - an ideal combination. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.

Conclusion

To summarise, shareholders should always check that Lillestrøm Sparebank's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Lillestrøm Sparebank has a low and conservative payout ratio. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Lillestrøm Sparebank has a number of positive attributes, but falls short of our ideal dividend company. It may be worth a look at the right price, though.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for Lillestrøm Sparebank that investors should know about before committing capital to this stock.

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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