Three Things You Should Check Before Buying LillestrømBanken (OB:LSTSB-ME) For Its Dividend

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Could LillestrømBanken (OB:LSTSB-ME) 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 stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

LillestrømBanken has only been paying a dividend for a year or so, so investors might be curious about its 6.9% yield. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

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. In the last year, LillestrømBanken paid out 12% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

Remember, you can always get a snapshot of LillestrømBanken's latest financial position, by checking our visualisation of its financial health.

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. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. During the past one-year period, the first annual payment was øre8.54 in 2018, compared to øre7.40 last year. The dividend has fallen 13% over that period.

A shrinking dividend over a one-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. LillestrømBanken's earnings per share are down -6.6% over the past year. While this is not ideal, one year is a short time in business, and we wouldn't want to get too hung up on this. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.

We'd also point out that LillestrømBanken issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

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. Firstly, we like that LillestrømBanken has a low and conservative payout ratio. Earnings per share are down, and to our mind LillestrømBanken has not been paying a dividend long enough to demonstrate its resilience across economic cycles. LillestrømBanken might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Now, if you want to look closer, it would be worth checking out our free research on LillestrømBanken management tenure, salary, and performance.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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.