Today we're going to take a closer look at Equinor ASA (OB: EQNR) from a dividend investor perspective. Having strong business and reinvesting dividends is generally seen as an attractive way to increase your wealth. Sometimes investors buy a share for their dividend and lose money because the share price falls more than they made from dividend payments.
Since Equinor has a 5.1% return and a dividend has been paid for over 10 years, the company should be very interesting for many investors. We would guess that many investors bought it for income. When buying stocks for their dividends, you should always go through the following checks to see if the dividend looks sustainable.
Click on the interactive chart for a full dividend analysis
Dividends are usually paid out of company earnings. If a company pays more than it earns, the dividend may no longer be sustainable – hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way to check whether a dividend is sustainable. Last year Equinor paid 64% of its profit as a dividend. A payout ratio above 50% generally implies that a company will reach maturity, although it is still possible to reinvest in the business or increase the dividend over time.
Another important check is whether the free cash flow generated is sufficient to distribute the dividend. Equinor paid out 57% of its free cash flow last year, which is acceptable, but is gradually limiting the amount of revenue that can be reinvested in the business. It is positive to see Equinor's dividend covered by both profits and cash flow, as this is generally a sign of the sustainability of the dividend and a lower payout ratio usually suggests a larger margin of safety before a cut in the dividend ,
Remember that you can always get an overview of Equinor's current financial position by reviewing our visualization of its financial condition.
Volatility of the dividend
From the perspective of a high-income investor who wants to earn dividends for years, there is little point in buying a stock if its dividend is regularly reduced or is not reliable. Equinor has been paying dividends for a long time, but for the purposes of this analysis, we're only looking at the last 10 years of payments. This dividend has been unstable, which we call one or more declines by at least 20%. In 2010, the first annual payment in 2010 was $ 1.10, compared to $ 1.04 in the previous year. The dividend has fallen by less than 1% per year during this period.
We are fighting to buy Equinor for its dividend as payments have shrunk over the past decade.
Growth potential of the dividend
With a relatively unstable dividend, it is all the more important to see whether earnings per share (EPS) grow. Why take the risk that a dividend will be cut unless there is a good chance of higher dividends in the future? In the past five years, Equinor's earnings per share have dropped to around 4.6% per year. A moderate drop in earnings per share is not particularly noteworthy, but does not automatically make a dividend prohibitive. Still, we would prefer earnings per share to grow when examining dividend stocks.
In summary, shareholders should always consider whether Equinor's dividends are affordable, whether dividend payments are relatively stable, and whether they have a good chance of increasing their profits and dividends. First, we think Equinor pays an acceptable percentage of its cash flow and profit. Second, earnings per share declined and the dividend has been lowered at least once in the past. In summary, Equinor has a number of shortcomings that we find difficult to overcome. Things could change, but we believe there are likely to be more attractive alternatives.
Without some growth in earnings per share over time, the dividend will ultimately come under pressure from either costs or inflation. However, companies can change, and we think it makes sense to review analysts' forecasts for the company.
Are you looking for more profitable dividend ideas? Try our curated list of dividend stocks with a return of more than 3%.
If you discover an error that justifies a correction, please contact the editorial team at firstname.lastname@example.org. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.
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