Why It Might Not Make Sense To Buy Selvaag Bolig ASA (OB:SBO) For Its Upcoming Dividend

Selvaag Bolig ASA (OB:SBO) stock is about to trade ex-dividend in 4 days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Selvaag Bolig's shares before the 25th of April to receive the dividend, which will be paid on the 8th of May.

The company's next dividend payment will be kr01.25 per share, and in the last 12 months, the company paid a total of kr1.25 per share. Calculating the last year's worth of payments shows that Selvaag Bolig has a trailing yield of 3.5% on the current share price of kr036.20. If you buy this business for its dividend, you should have an idea of whether Selvaag Bolig's dividend is reliable and sustainable. So we need to investigate whether Selvaag Bolig can afford its dividend, and if the dividend could grow.

We've discovered 2 warning signs about Selvaag Bolig. View them for free.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Selvaag Bolig paid out 66% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 113% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While Selvaag Bolig'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 Selvaag Bolig to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Check out our latest analysis for Selvaag Bolig

Click here to see how much of its profit Selvaag Bolig paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Selvaag Bolig's earnings per share have dropped 23% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Selvaag Bolig's dividend payments are effectively flat on where they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

To Sum It Up

From a dividend perspective, should investors buy or avoid Selvaag Bolig? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Selvaag Bolig.

With that being said, if you're still considering Selvaag Bolig as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Selvaag Bolig has 2 warning signs (and 1 which is concerning) we think you should know about.

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.