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Are Dividend Investors Getting More Than They Bargained For With Mowi ASA's (OB:MOWI) Dividend?

Simply Wall St

Could Mowi ASA (OB:MOWI) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

In this case, Mowi likely looks attractive to investors, given its 4.6% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple research can reduce the risk of buying Mowi for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Mowi!

OB:MOWI Historical Dividend Yield, November 16th 2019

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Mowi paid out 120% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Mowi paid out 124% of its free cash flow last year, which we think is concerning if cash flows do not improve. As Mowi's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Is Mowi's Balance Sheet Risky?

As Mowi's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. Mowi has net debt of 1.43 times its EBITDA, which is generally an okay level of debt for most companies.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Net interest cover of 11.66 times its interest expense appears reasonable for Mowi, although we're conscious that even high interest cover doesn't make a company bulletproof.

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

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Mowi's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was €0.43 in 2009, compared to €1.02 last year. Dividends per share have grown at approximately 8.9% per year over this time. Mowi's dividend payments have fluctuated, so it hasn't grown 8.9% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential

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. While there may be fluctuations in the past , Mowi's earnings per share have basically not grown from where they were five years ago. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. Still, the company has struggled to grow its EPS, and currently pays out 120% of its earnings. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

Conclusion

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. Mowi paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. Using these criteria, Mowi looks quite suboptimal from a dividend investment perspective.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 8 analysts we track are forecasting for Mowi for free with public analyst estimates for the company.

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.