Norsk Hydro's (OB:NHY) Shareholders Will Receive A Smaller Dividend Than Last Year

Norsk Hydro ASA (OB:NHY) has announced that on 20th of May, it will be paying a dividend ofNOK2.25, which a reduction from last year's comparable dividend. However, the dividend yield of 4.2% still remains in a typical range for the industry.

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

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Before making this announcement, Norsk Hydro was paying out quite a large proportion of both earnings and cash flow, with the dividend being 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.

Over the next year, EPS is forecast to expand by 149.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 35%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Check out our latest analysis for Norsk Hydro

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of NOK0.75 in 2015 to the most recent total annual payment of NOK2.25. This means that it has been growing its distributions at 12% per annum over that time. 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

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. Norsk Hydro has seen EPS rising for the last five years, at 14% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

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 general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Norsk Hydro that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.