Arjo's (STO:ARJO B) Dividend Is Being Reduced To SEK0.85

Arjo AB (publ)'s (STO:ARJO B) dividend is being reduced from last year's payment covering the same period to SEK0.85 on the 27th of April. Despite the cut, the dividend yield of 2.1% will still be comparable to other companies in the industry.

See our latest analysis for Arjo

Arjo's Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Arjo's dividend was only 52% of earnings, however it was paying out 661% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Looking forward, earnings per share is forecast to rise by 116.4% over the next year. If the dividend continues on this path, the payout ratio could be 28% by next year, which we think can be pretty sustainable going forward.

Arjo's Dividend Has Lacked Consistency

It's comforting to see that Arjo has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. The dividend has gone from an annual total of SEK0.50 in 2018 to the most recent total annual payment of SEK0.85. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. Arjo has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

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. We are encouraged to see that Arjo has grown earnings per share at 31% per year over the past five years. Arjo is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

Our Thoughts On Arjo's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Arjo is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 3 warning signs for Arjo (of which 1 is a bit unpleasant!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.