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Could Sparebanken Øst (OB:SPOG) 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. 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.
With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Sparebanken Øst is a new dividend aristocrat in the making. It sure looks interesting on these metrics – but there’s always more to the story . There are a few simple ways to reduce the risks of buying Sparebanken Øst for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
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. Looking at the data, we can see that 76% of Sparebanken Øst’s profits were paid out as dividends in the last 12 months. It’s paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
Consider getting our latest analysis on Sparebanken Øst’s financial position here.
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. The first recorded dividend for Sparebanken Øst, 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 øre4.00 in 2010, compared to øre4.60 last year. Dividends per share have grown at approximately 1.6% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.
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. Sparebanken Øst’s earnings per share have been essentially flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Sparebanken Øst’s payout ratio is within normal bounds. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. To conclude, we’ve spotted a couple of potential concerns with Sparebanken Øst that may make it less than ideal candidate for dividend investors.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 Sparebanken Øst analysts we track are forecasting continued growth with our free report on analyst estimates 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 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.