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Is Skandinaviska Enskilda Banken AB (publ.) (STO:SEB A) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With a nine-year payment history and a 7.1% yield, many investors probably find Skandinaviska Enskilda Banken AB (publ.) intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Skandinaviska Enskilda Banken AB (publ.) for its dividend, and we'll go through these below.
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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Skandinaviska Enskilda Banken AB (publ.) paid out 54% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We update our data on Skandinaviska Enskilda Banken AB (publ.) every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Looking at the last decade of data, we can see that Skandinaviska Enskilda Banken AB (publ.) paid its first dividend at least nine years ago. Its dividend has not fluctuated much that time, which we like, but we're conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past nine-year period, the first annual payment was kr1.00 in 2010, compared to kr6.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time.
We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Skandinaviska Enskilda Banken AB (publ.) has grown its earnings per share at 10% per annum over the past five years. Earnings per share have been growing rapidly, but given that it is paying out more than half of its earnings as dividends, we wonder how Skandinaviska Enskilda Banken AB (publ.) will keep funding its growth projects in the future.
To summarise, shareholders should always check that Skandinaviska Enskilda Banken AB (publ.)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Skandinaviska Enskilda Banken AB (publ.)'s payout ratio is within normal bounds. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. In summary, we're unenthused by Skandinaviska Enskilda Banken AB (publ.) as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 17 Skandinaviska Enskilda Banken AB (publ.) 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 email@example.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.