Should You Buy Sparebanken Sør (OB:SOR) For Its Dividend?

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Today we’ll take a closer look at Sparebanken Sør (OB:SOR) from a dividend investor’s perspective. Owning a strong dividend company and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

In this case, Sparebanken Sør likely looks attractive to dividend investors, given its 6.4% dividend yield and nine-year payment history. We’d agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Sparebanken Sør for its dividend, and we’ll go through these below.

Click the interactive chart for our full dividend analysis
OB:SOR Historical Dividend Yield, April 30th 2019
OB:SOR Historical Dividend Yield, April 30th 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 be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Sparebanken Sør paid out 59% 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.

Consider getting our latest analysis on Sparebanken Sør’s financial position 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 first recorded dividend for Sparebanken Sør, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we’re cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was øre8.50 in 2010, compared to øre6.00 last year. The dividend has shrunk at around -3.8% a year during that period. Sparebanken Sør’s dividend hasn’t shrunk linearly at -3.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. In the last five years, Sparebanken Sør’s earnings per share have shrunk at approximately 47% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

To summarise, shareholders should always check that Sparebanken Sør’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Sparebanken Sør’s payout ratio is within an average range for most market participants. Earnings per share are down, and Sparebanken Sør’s dividend has been cut at least once in the past, which is disappointing. In short, we’re not keen on Sparebanken Sør from a dividend perspective. Businesses can change, but we’ve spotted a few too many concerns with this one to get comfortable.

Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.