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Is Avanza Bank Holding AB (publ) (STO:AZA) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Investors might not know much about Avanza Bank Holding’s dividend prospects, even though it has been paying dividends for the last nine years and offers a 2.8% yield. While the yield may not look too great, the relatively long payment history is interesting. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.Explore this interactive chart for our latest analysis on Avanza Bank Holding!
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Looking at the data, we can see that 95% of Avanza Bank Holding’s profits were paid out as dividends in the last 12 months. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable – still, we think it is a concern.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Avanza Bank Holding’s cash payout ratio last year was 6.4%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.
With a strong net cash balance, Avanza Bank Holding investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Avanza Bank Holding every 24 hours, so you can always get our latest analysis of its financial health, here.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. The first recorded dividend for Avanza Bank Holding, in the last decade, was nine years ago. It’s good to see that Avanza Bank Holding has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was kr1.60 in 2010, compared to kr2.10 last year. Dividends per share have grown at approximately 3.1% per year over this time. Avanza Bank Holding’s dividend payments have fluctuated, so it hasn’t grown 3.1% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Avanza Bank Holding has grown its earnings per share at 10% per annum over the past five years. While EPS are growing rapidly, Avanza Bank Holding paid out a very high 95% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re a bit uncomfortable with its high payout ratio, although we note cashflow was stronger than income. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In sum, we find it hard to get excited about Avanza Bank Holding from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 Avanza Bank Holding analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.