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Is Besqab AB (publ) (STO:BESQ) At Risk Of Cutting Its Dividend?

Simply Wall St

Could Besqab AB (publ) (STO:BESQ) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Investors might not know much about Besqab's dividend prospects, even though it has been paying dividends for the last five years and offers a 1.7% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. Some simple research can reduce the risk of buying Besqab for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

OM:BESQ Historical Dividend Yield, November 8th 2019

Payout ratios

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Besqab paid out 50% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Besqab pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

With a strong net cash balance, Besqab investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Besqab every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Besqab has been paying a dividend for the past five years. During the past five-year period, the first annual payment was kr2.25 in 2014, compared to kr2.50 last year. Dividends per share have grown at approximately 2.1% per year over this time. Besqab's dividend payments have fluctuated, so it hasn't grown 2.1% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Besqab's EPS are effectively flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation.

Conclusion

To summarise, shareholders should always check that Besqab's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Besqab has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share are down, and Besqab's dividend has been cut at least once in the past, which is disappointing. In this analysis, Besqab doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

See if management have their own wealth at stake, by checking insider shareholdings in Besqab stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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 editorial-team@simplywallst.com. 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.