Dividend Investors: Don't Be Too Quick To Buy SalMar ASA (OB:SALM) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that SalMar ASA (OB:SALM) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase SalMar's shares on or after the 9th of June, you won't be eligible to receive the dividend, when it is paid on the 22nd of June.

The company's upcoming dividend is kr20.00 a share, following on from the last 12 months, when the company distributed a total of kr20.00 per share to shareholders. Looking at the last 12 months of distributions, SalMar has a trailing yield of approximately 4.2% on its current stock price of NOK477.6. If you buy this business for its dividend, you should have an idea of whether SalMar's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for SalMar

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SalMar is paying out an acceptable 66% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether SalMar generated enough free cash flow to afford its dividend. It paid out 94% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

While SalMar's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were SalMar to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at SalMar, with earnings per share up 7.1% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past nine years, SalMar has increased its dividend at approximately 11% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is SalMar worth buying for its dividend? SalMar is paying out a reasonable percentage of its income and an uncomfortably high 94% of its cash flow as dividends. At least earnings per share have been growing steadily. Bottom line: SalMar has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in SalMar and want to know more, you'll find it very useful to know what risks this stock faces. For example - SalMar has 3 warning signs we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.