Erste Group Bank AG (VIE:EBS) will increase its dividend on May 25 to €1.60. This will take the annual payout from 5.5% to 8.9% of the share price, which is higher than most companies in the industry pay.
While the dividend yield is important for income investors, it’s also important to take into account any large changes in share price, as this will generally outweigh any gains from distributions. Erste Group Bank’s share price has fallen by 31% in the last 3 months, which is not ideal for investors and may explain a sharp increase in the dividend yield.
See our latest analysis for Erste Group Bank
Erste Group Bank payment has strong revenue coverage
If the payouts aren’t sustainable, a high return for a few years won’t matter much. Erste Group Bank is fairly easily earning enough to cover the dividend, but is disappointed by weak cash flow. We think cash flow should take priority over earnings, so that’s certainly a concern for the dividend going forward.
Over the next year, EPS is expected to fall 3.8%. If the dividend holds up on recent trends, we estimate the payout ratio could be 67%, which we consider quite comfortable, with most of the company’s earnings remaining to grow the business going forward. .
Erste Group Bank’s dividend lacks consistency
In retrospect, Erste Group Bank’s dividend has not been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2013, the dividend has increased from €0.40 to €1.60. This equates to a compound annual growth rate (CAGR) of approximately 17% per year during this period. It’s great to see strong growth in dividend payouts, but cuts are concerning as it may indicate that the payout policy is too ambitious.
The dividend has growth potential
With a relatively volatile dividend, it is even more important to assess whether earnings per share are increasing, which could indicate dividend growth in the future. Erste Group Bank has impressed us by increasing EPS by 9.8% per year over the past five years. EPS growth bodes well for the dividend, as does the low payout ratio the company is currently reporting.
Overall, we still like to see the dividend increase, but we don’t think Erste Group Bank will make a great income stock. Although the low payout ratio is a redeeming feature, this is offset by the minimum cash to cover payouts. We would be a bit cautious to rely on this stock primarily for dividend income.
It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic one. Meanwhile, despite the importance of dividend payouts, these are not the only factors our readers should be aware of when evaluating a company. Example: we have identified 4 warning signs for Erste Group Bank (2 of which should not be ignored!) that you should know. Erste Group Bank isn’t quite the opportunity you were looking for? Why not check out our selection of the best dividend stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.