Swedbank (STO:SWED A) Is Increasing Its Dividend To kr11.25

Swedbank AB (publ) (STO:SWED A) will increase its dividend on the 6th of April to kr11.25. This will take the annual payment from 5.4% to 11% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Swedbank

Swedbank's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Swedbank's earnings easily covered the dividend, but free cash flows were negative. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

Looking forward, earnings per share is forecast to fall by 5.5% over the next year. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 92%, meaning that most of the company's earnings are being paid out to shareholders.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from kr5.30 to kr9.25. This implies that the company grew its distributions at a yearly rate of about 5.7% over that duration. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Dividend Growth May Be Hard To Achieve

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. Unfortunately, Swedbank's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Growth of 1.1% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. This could mean the dividend doesn't have the growth potential we look for going into the future.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Swedbank will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Swedbank that investors should know about before committing capital to this stock. Is Swedbank not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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