Dividend-paying shares like Scandinavian Tobacco Group A / S (CPH: STG) are usually fashionable with buyers, and for good cause – some analysis means that a good portion of all inventory returns comes from reinvesting dividends. . In case you hope to reside off dividend revenue, you will need to be a lot stricter along with your investments than the typical bettor.

With a five-year cost historical past and a yield of 5.4%, many buyers are more likely to discover the Scandinavian Tobacco Group intriguing. It sounds attention-grabbing on these metrics – however there’s at all times extra to inform. A easy evaluation can supply a number of info when shopping for a enterprise for its dividend, and we’ll go over it beneath.

Discover this interactive graph for our newest evaluation on Scandinavian Tobacco Group!

Payout ratios

Firms (often) pay dividends on their earnings. If an organization pays greater than it earns, the dividend could have to be lowered. We should due to this fact ask ourselves whether or not an organization’s dividend is sustainable, relative to its after-tax internet revenue. Final yr, Scandinavian Tobacco Group paid 67% of its earnings within the type of dividends. This can be a pretty regular payout ratio in most corporations. It permits a better dividend to be paid to shareholders, however limits the capital retained within the firm – which could be good or dangerous.

Along with evaluating dividends to earnings, we have to test whether or not the corporate has generated sufficient money to pay its dividend. Of the free money movement it generated final yr, Scandinavian Tobacco Group paid 40% in dividends, suggesting the dividend is inexpensive. It’s encouraging to see that the dividend is roofed by each earnings and money movement. This often means that the dividend is sustainable, so long as earnings do not fall precipitously.

Make sure to get our newest evaluation on Scandinavian Tobacco Group’s monetary situation right here.

Dividend volatility

One of many main dangers of dependancy to dividend revenue is the chance for an organization to wrestle financially and scale back its dividend. Not solely does your revenue go down, however the worth of your funding additionally goes down – disagreeable. Scandinavian Tobacco Group has paid a dividend for 5 years. Within the final 5 years, the primary annual cost was 5 kr in 2016, in comparison with 6.1 kr final yr. This works out to a compound annual development price (CAGR) of round 4.1% per yr throughout that point.

We like that the dividend hasn’t gone down. Nonetheless, we’re conscious that the corporate doesn’t but have too lengthy a historical past of dividend funds, which makes us fearful that we’re not counting on its dividend revenue.

Potential for dividend development

Dividend payouts have been fixed over the previous few years, however we nonetheless must test to see if earnings per share (EPS) are rising, as it will assist preserve the buying energy of the dividend. Scandinavian Tobacco Group has grown its earnings per share by 6.3% per yr over the previous 5 years. Earnings per share are rising at a suitable price, regardless of the corporate paying greater than half of its earnings, which we consider may restrict its capability to reinvest in its enterprise.

Conclusion

In abstract, shareholders ought to at all times test that Scandinavian Tobacco Group’s dividends are inexpensive, that its dividend funds are comparatively secure, and that it has good prospects for development in earnings and dividend. First, we consider that Scandinavian Tobacco Group has a suitable payout ratio and that its dividend is properly lined by money movement. Second, earnings development has been extraordinary and it has a shorter dividend cost historical past than we want. In the end, Scandinavian Tobacco Group falls in need of our dividend evaluation. It is not that we predict it is a dangerous firm – simply that there’s most likely a extra engaging dividend outlook on this evaluation.

Buyers have a tendency to favor corporations with a constant and secure dividend coverage over these with an irregular coverage. Nonetheless, there are a bunch of different elements that buyers want to think about, apart from dividend funds, when analyzing a enterprise. For example, we’ve got recognized 2 warning indicators for Scandinavian Tobacco Group which you have to be conscious of earlier than investing.

Searching for extra excessive yield dividend concepts? Attempt our checklist of dividend paying shares with a yield above 3%.

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