Norsk Hydro (OB:NHY) Is Reducing Its Dividend To NOK2.25

Norsk Hydro ASA's (OB:NHY) dividend is being reduced from last year's payment covering the same period to NOK2.25 on the 20th of May. This means that the dividend yield is 3.2%, which is a bit low when comparing to other companies in the industry.

View our latest analysis for Norsk Hydro

Norsk Hydro's Future Dividend Projections Appear Well Covered By Earnings

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Prior to this announcement, Norsk Hydro's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 247% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Looking forward, earnings per share is forecast to rise by 170.7% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 33% which would be quite comfortable going to take the dividend forward.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2015, the annual payment back then was NOK0.75, compared to the most recent full-year payment of NOK2.25. This implies that the company grew its distributions at a yearly rate of about 12% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth Could Be Constrained

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Norsk Hydro has been growing its earnings per share at 14% a year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 12 analysts we track are forecasting for Norsk Hydro for free with public analyst estimates for the company. Is Norsk Hydro not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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