Is AAK AB (publ.) (STO:AAK) An Attractive Dividend Stock?

Could AAK AB (publ.) (STO:AAK) 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. 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.

A 1.0% yield is nothing to get excited about, but investors probably think the long payment history suggests AAK AB (publ.) has some staying power. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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Payout ratios

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 form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 33% of AAK AB (publ.)'s profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 65% of its free cash flow, which is not bad per se, but does start to limit the amount of cash AAK AB (publ.) has available to meet other needs. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Remember, you can always get a snapshot of AAK AB (publ.)'s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

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. For the purpose of this article, we only scrutinise the last decade of AAK AB (publ.)'s dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was kr0.67 in 2010, compared to kr1.85 last year. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time.

It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but AAK AB (publ.) has done it, which we really like.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It's good to see AAK AB (publ.) has been growing its earnings per share at 14% a year over the past five years. A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right in the cusp of its growth phase. At the right price, we might be interested.

Conclusion

To summarise, shareholders should always check that AAK 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. AAK AB (publ.)'s dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Overall we think AAK AB (publ.) scores well on our analysis. It's not quite perfect, but we'd definitely be keen to take a closer look.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 5 AAK AB (publ.) analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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.

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. Thank you for reading.