Norsk Hydro's (OB:NHY) Dividend Is Being Reduced To NOK2.50

Norsk Hydro ASA's (OB:NHY) dividend is being reduced from last year's payment covering the same period to NOK2.50 on the 21st of May. This means that the annual payment is 3.5% of the current stock price, which is lower than what the rest of the industry is paying.

Check out our latest analysis for Norsk Hydro

Norsk Hydro's Payment Has Solid Earnings Coverage

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, the company was paying out 142% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 58%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Looking forward, earnings per share is forecast to rise exponentially over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 36%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was NOK0.75 in 2014, and the most recent fiscal year payment was NOK2.50. This means that it has been growing its distributions at 13% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend's Growth Prospects Are Limited

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. It's not great to see that Norsk Hydro's earnings per share has fallen at approximately 3.0% per year over the past five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

Norsk Hydro's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs for Norsk Hydro that investors should take into consideration. 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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