Today we’ll take a closer look at Sparebanken Sør (OB:SOR) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, Sparebanken Sør likely looks attractive to investors, given its 6.3% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. 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.
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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Sparebanken Sør paid out 61% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Sparebanken Sør has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was kr12.00 in 2009, compared to kr6.00 last year. The dividend has shrunk at around 6.7% a year during that period. Sparebanken Sør’s dividend hasn’t shrunk linearly at 6.7% per annum, but the CAGR is a useful estimate of the historical rate of change.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Sparebanken Sør’s earnings per share have shrunk at 47% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Sparebanken Sør’s earnings per share, which support the dividend, have been anything but stable.
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. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. To conclude, we’ve spotted a couple of potential concerns with Sparebanken Sør that may make it less than ideal candidate for dividend investors.
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%.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.