Elkem's (OB:ELK) Dividend Will Be Increased To kr3.00

Elkem ASA (OB:ELK) has announced that it will be increasing its dividend on the 6th of May to kr3.00. This makes the dividend yield 7.9%, which is above the industry average.

Check out our latest analysis for Elkem

Elkem's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last dividend, Elkem is earning enough to cover the payment, but the it makes up 115% of cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Over the next year, EPS is forecast to expand by 1.0%. Assuming the dividend continues along recent trends, we think the payout ratio could be 41% by next year, which is in a pretty sustainable range.

Elkem's Dividend Has Lacked Consistency

The track record isn't the longest, but we are already seeing a bit of instability in the payments. The first annual payment during the last 3 years was kr2.60 in 2019, and the most recent fiscal year payment was kr3.00. This means that it has been growing its distributions at 4.9% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Elkem has seen EPS rising for the last five years, at 32% per annum. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Elkem could prove to be a strong dividend payer.

Our Thoughts On Elkem's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Elkem's payments are rock solid. While Elkem is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 4 warning signs for Elkem (1 is a bit concerning!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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