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We Wouldn't Be Too Quick To Buy Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) Before It Goes Ex-Dividend

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 1st of April in order to be eligible for this dividend, which will be paid on the 7th of April.

Telefonaktiebolaget LM Ericsson's next dividend payment will be kr0.75 per share, and in the last 12 months, the company paid a total of kr1.50 per share. Based on the last year's worth of payments, Telefonaktiebolaget LM Ericsson has a trailing yield of 2.0% on the current stock price of SEK75.6. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Telefonaktiebolaget LM Ericsson has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Telefonaktiebolaget LM Ericsson

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Telefonaktiebolaget LM Ericsson paid out 223% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 32% of its free cash flow in the past year.

It's good to see that while Telefonaktiebolaget LM Ericsson's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

OM:ERIC B Historical Dividend Yield March 27th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Telefonaktiebolaget LM Ericsson's earnings per share have dropped 28% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Telefonaktiebolaget LM Ericsson's dividend payments per share have declined at 2.8% per year on average over the past ten years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy Telefonaktiebolaget LM Ericsson for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 223% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Telefonaktiebolaget LM Ericsson despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 2 warning signs for Telefonaktiebolaget LM Ericsson that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.