Today we’ll take a closer look at Wihlborgs Fastigheter AB (publ) (STO:WIHL) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, Wihlborgs Fastigheter likely looks attractive to investors, given its 3.2% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Wihlborgs Fastigheter for its dividend, and we’ll focus on the most important aspects below.
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OM:WIHL Historical Dividend Yield, March 16th 2020
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. In the last year, Wihlborgs Fastigheter paid out 24% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Wihlborgs Fastigheter’s cash payout ratio in the last year was 34%, which suggests dividends were well covered by cash generated by the business. It’s positive to see that Wihlborgs Fastigheter’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Is Wihlborgs Fastigheter’s Balance Sheet Risky?
As Wihlborgs Fastigheter has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With a net debt to EBITDA ratio of 11.11 times, Wihlborgs Fastigheter is very highly levered. While this debt might be serviceable, we would still say it carries substantial risk for the investor who hopes to live on the dividend.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Wihlborgs Fastigheter has EBIT of 6.79 times its interest expense, which we think is adequate. Despite a decent level of interest cover, shareholders should remain cautious about the high level of net debt. Rising rates or tighter debt markets have a nasty habit of making fools of highly-indebted dividend stocks.
Remember, you can always get a snapshot of Wihlborgs Fastigheter’s latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
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. For the purpose of this article, we only scrutinise the last decade of Wihlborgs Fastigheter’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was kr1.63 in 2010, compared to kr4.50 last year. Dividends per share have grown at approximately 11% per year over this time.
It’s rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Wihlborgs Fastigheter 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 Wihlborgs Fastigheter has been growing its earnings per share at 49% a year over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly – an ideal combination.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we like that the company’s dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Next, growing earnings per share and steady dividend payments is a great combination. Overall, we think there are a lot of positives to Wihlborgs Fastigheter from a dividend perspective.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Wihlborgs Fastigheter has 4 warning signs (and 2 which are a bit concerning) we think you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 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.
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