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What To Know Before Buying NN Group N.V. (AMS:NN) For Its Dividend

Simply Wall St

Could NN Group N.V. (AMS:NN) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, NN Group likely looks attractive to dividend investors, given its 5.6% dividend yield and four-year payment history. It sure looks interesting on these metrics - but there's always more to the story . The company also bought back stock equivalent to around 2.4% of market capitalisation this year. There are a few simple ways to reduce the risks of buying NN Group for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on NN Group!

ENXTAM:NN Historical Dividend Yield, July 31st 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, NN Group paid out 54% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

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

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. NN Group has been paying a dividend for the past four years. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past four-year period, the first annual payment was €1.14 in 2015, compared to €1.90 last year. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. The dividends haven't grown at precisely 14% every year, but this is a useful way to average out the historical rate of growth.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see NN Group has grown its earnings per share at 33% per annum over the past five years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that NN Group's growth will be slower in the future.

Conclusion

To summarise, shareholders should always check that NN Group'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 NN Group has an acceptable payout ratio. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. NN Group might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 10 NN Group analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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.