Is It Worth Buying Sparebank 1 Nordvest (OB:SNOR) For Its 5.7% Dividend Yield?

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Dividend paying stocks like Sparebank 1 Nordvest (OB:SNOR) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

Some readers mightn’t know much about Sparebank 1 Nordvest’s 5.7% dividend, as it has only been paying distributions for a year or so. Some simple research can reduce the risk of buying Sparebank 1 Nordvest for its dividend – read on to learn more.

Click the interactive chart for our full dividend analysis

OB:SNOR Historical Dividend Yield, July 18th 2019
OB:SNOR Historical Dividend Yield, July 18th 2019

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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 40% of Sparebank 1 Nordvest’s profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

Dividend Volatility

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. With a payment history of less than 2 years, we think it’s a bit too soon to think about living on the income from its dividend. Dividends per share have grown at approximately 9.1% per year over this time.

The dividend has been growing at a reasonable rate, which we like. We’re conscious though that one of the best ways to detect a multi-decade consistent dividend-payer, is to watch a company pay dividends for 20 years – a distinction Sparebank 1 Nordvest has not achieved yet.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Sparebank 1 Nordvest has grown its earnings per share at 116% per annum over the past five years. With high earnings per share growth in recent times and a modest payout ratio, we think this is an attractive combination if earnings can be reinvested to generate further growth.

Conclusion

To summarise, shareholders should always check that Sparebank 1 Nordvest’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re glad to see Sparebank 1 Nordvest has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Sparebank 1 Nordvest 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.

Are management backing themselves to deliver performance? Check their shareholdings in Sparebank 1 Nordvest in our latest insider ownership analysis.

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.