Here's How We Evaluate Nobia AB (publ)'s (STO:NOBI) Dividend
Simply Wall St
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Dividend paying stocks like Nobia AB (publ) (STO:NOBI) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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.
With a six-year payment history and a 7.8% yield, many investors probably find Nobia intriguing. It sure looks interesting on these metrics - but there's always more to the story . Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to be form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Nobia paid out 91% of its profit as dividends. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 77% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It's good to see that while Nobia's dividends were not well covered by profits, at least they are affordable from a free cash flow perspective. Even so, if the company were to continue paying out almost all of its profits, we'd be concerned about whether the dividend is sustainable in a downturn.
Is Nobia's Balance Sheet Risky?
As Nobia'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 on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. With net debt of more than twice its EBITDA, Nobia has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Nobia has interest cover of more than 12 times its interest expense, which we think is quite strong.
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. Looking at the data, we can see that Nobia has been paying a dividend for the past six years. 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 six-year period, the first annual payment was kr0.50 in 2013, compared to kr4.00 last year. Dividends per share have grown at approximately 41% per year over this 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. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. It's good to see Nobia has been growing its earnings per share at 15% a year over the past 5 years. Although earnings per share are up nicely Nobia is paying out 91% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
Conclusion
To summarise, shareholders should always check that Nobia's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that Nobia paid out such a high percentage of its income, although its cashflow is in better shape. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Ultimately, Nobia comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 3 analysts we track are forecasting for Nobia for free with public analyst estimates for the company.
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.
