Axfood's (STO:AXFO) Shareholders Will Receive A Bigger Dividend Than Last Year

Axfood AB (publ) (STO:AXFO) will increase its dividend from last year's comparable payment on the 26th of March to SEK4.50. This will take the annual payment to 3.7% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for Axfood

Axfood's Payment Could Potentially Have Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before this announcement, Axfood was paying out 86% of earnings, but a comparatively small 48% of free cash flows. This leaves plenty of cash for reinvestment into the business.

The next year is set to see EPS grow by 39.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 66%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Axfood Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was SEK4.25 in 2015, and the most recent fiscal year payment was SEK8.75. This works out to be a compound annual growth rate (CAGR) of approximately 7.5% a year over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.

We Could See Axfood's Dividend Growing

The company's investors will be pleased to have been receiving dividend income for some time. Axfood has seen EPS rising for the last five years, at 5.2% 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.

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 company is generating plenty of cash, but we still think the dividend is a bit high for comfort. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Earnings growth generally bodes well for the future value of company dividend payments. See if the 5 Axfood analysts we track are forecasting continued growth with our free report on analyst estimates for the company. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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