Elekta's (STO:EKTA B) Upcoming Dividend Will Be Larger Than Last Year's

Elekta AB (publ) (STO:EKTA B) has announced that it will be increasing its dividend from last year's comparable payment on the 2nd of March to SEK1.20. This will take the dividend yield to an attractive 4.0%, providing a nice boost to shareholder returns.

Check out the opportunities and risks within the SE Medical Equipment industry.

Elekta's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, Elekta was paying out quite a large proportion of both earnings and cash flow, with the dividend being 458% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

The next year is set to see EPS grow by 76.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 57%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2012, the annual payment back then was SEK1.00, compared to the most recent full-year payment of SEK2.40. This implies that the company grew its distributions at a yearly rate of about 9.1% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Elekta might have put its house in order since then, but we remain cautious.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Elekta has impressed us by growing EPS at 23% per year over the past five years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Elekta is not retaining those earnings to reinvest in growth.

Elekta's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Elekta's payments are rock solid. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We don't think Elekta is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Elekta that you should be aware of before investing. Is Elekta not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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