The board of Axfood AB (publ) (STO:AXFO) has announced that it will be increasing its dividend on the 29th of September to kr3.75. This will take the annual payment from 3.3% to 3.3% of the stock price, which is above what most companies in the industry pay.
Axfood's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, Axfood was paying out 80% of earnings, but a comparatively small 44% of free cash flows. This leaves plenty of cash for reinvestment into the business.
Earnings per share is forecast to rise by 1.1% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 87%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.
Axfood Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from kr3.00 in 2011 to the most recent annual payment of kr7.50. This means that it has been growing its distributions at 9.6% per annum over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.
We Could See Axfood's Dividend Growing
Investors could be attracted to the stock based on the quality of its payment history. It's encouraging to see Axfood has been growing its earnings per share at 6.7% a year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.
Our Thoughts On Axfood's Dividend
Overall, we always like to see the dividend being raised, but we don't think Axfood will make a great income stock. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Axfood is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 4 analysts we track are forecasting for Axfood for free with public analyst estimates for the company. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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