Clas Ohlson's (STO:CLAS B) Upcoming Dividend Will Be Larger Than Last Year's

The board of Clas Ohlson AB (publ) (STO:CLAS B) has announced that it will be paying its dividend of SEK6.50 on the 16th of September, an increased payment from last year's comparable dividend. This will take the dividend yield to an attractive 6.8%, providing a nice boost to shareholder returns.

Check out our latest analysis for Clas Ohlson

Clas Ohlson Is Paying Out More Than It Is Earning

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Clas Ohlson's dividend made up quite a large proportion of earnings but only 51% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

The next 12 months is set to see EPS grow by 4.6%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 114%, which probably can't continue without putting some pressure on the balance sheet.

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 SEK4.25, compared to the most recent full-year payment of SEK6.75. This implies that the company grew its distributions at a yearly rate of about 4.7% over that duration. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Although it's important to note that Clas Ohlson's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. Slow growth and a high payout ratio could mean that Clas Ohlson has maxed out the amount that it has been able to pay to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Clas Ohlson 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 would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Clas Ohlson that investors need to be conscious of moving forward. Is Clas Ohlson not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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