AB Volvo's (STO:VOLV B) Dividend Will Be Increased To SEK18.50

AB Volvo (publ) (STO:VOLV B) will increase its dividend from last year's comparable payment on the 9th of April to SEK18.50. This will take the dividend yield to an attractive 5.5%, providing a nice boost to shareholder returns.

View our latest analysis for AB Volvo

AB Volvo's Future Dividend Projections Appear Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, AB Volvo was paying only paying out a fraction of earnings, but the payment was a massive 134% of cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Earnings per share is forecast to rise by 8.2% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 76% which is a bit high but can definitely be sustainable.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the dividend has gone from SEK3.00 total annually to SEK18.50. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year 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.

The Dividend Has Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. AB Volvo has seen EPS rising for the last five years, at 7.0% per annum. AB Volvo definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Our Thoughts On AB Volvo's Dividend

Overall, we always like to see the dividend being raised, but we don't think AB Volvo will make a great income stock. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

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 identified 2 warning signs for AB Volvo (1 is potentially serious!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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