Is AB Electrolux (publ) (STO:ELUX B) A Smart Pick For Income Investors?

Simply Wall St

Tue, Jun 4, 2019, 10:58 PM

Today we'll take a closer look at AB Electrolux (publ) (STO:ELUX B) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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 goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if AB Electrolux is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story . Some simple analysis can reduce the risk of holding AB Electrolux for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

OM:ELUX B Historical Dividend Yield, June 5th 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. Looking at the data, we can see that 73% of AB Electrolux's profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. AB Electrolux paid out 107% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. While AB Electrolux's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were AB Electrolux to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Consider getting our latest analysis on AB Electrolux's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for AB Electrolux, in the last decade, was nine years ago. The dividend has been quite stable over the past nine years, which is great to see - although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past nine-year period, the first annual payment was kr4.00 in 2010, compared to kr8.50 last year. Dividends per share have grown at approximately 8.7% per year over this time.

AB Electrolux has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.

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. It's good to see AB Electrolux has been growing its earnings per share at 38% a year over the past 5 years. With recent, rapid earnings per share growth and a payout ratio of 73%, this business looks like an interesting prospect if earnings are reinvested effectively.

Conclusion

To summarise, shareholders should always check that AB Electrolux's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. AB Electrolux gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than AB Electrolux out there.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 13 analysts we track are forecasting for AB Electrolux for free with public 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.

Terms and Privacy Policy

Your Privacy Choices

Utah Privacy Notice

More Info