Today we’ll take a closer look at Surnadal Sparebank AS (OB:SUSB-ME) 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. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
Some readers mightn’t know much about Surnadalrebank’s 6.1% dividend, as it has only been paying distributions for a year or so. There are a few simple ways to reduce the risks of buying Surnadalrebank for its dividend, and we’ll go through these below.Explore this interactive chart for our latest analysis on Surnadalrebank!
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 18% of Surnadalrebank’s profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Consider getting our latest analysis on Surnadalrebank’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. 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. During the past one-year period, the first annual payment was øre9.76 in 2018, compared to øre7.00 last year. This works out to a decline of approximately 28% over that time.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether 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. Surnadalrebank’s earnings per share have fallen -49% over the past year. This is a pretty serious concern, and it would be worth investigating whether something fundamental in the business has changed – or broken. While one year of growth is good, we’d be remiss not to point out that a majority of companies see their growth rates slow over a longer period.
We’d also point out that Surnadalrebank issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
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. Firstly, we like that Surnadalrebank has a low and conservative payout ratio. Earnings per share are down, and to our mind Surnadalrebank has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Surnadalrebank might not be a bad business, but it doesn’t show all of the characteristics we look for in a dividend stock.
Are management backing themselves to deliver performance? Check their shareholdings in Surnadalrebank in our latest insider ownership analysis.
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 email@example.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.