Should You Buy Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) For Its Upcoming Dividend?
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 3 days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Telefonaktiebolaget LM Ericsson's shares on or after the 28th of September will not receive the dividend, which will be paid on the 2nd of October.
The company's next dividend payment will be kr01.50 per share, on the back of last year when the company paid a total of kr3.00 to shareholders. Based on the last year's worth of payments, Telefonaktiebolaget LM Ericsson has a trailing yield of 3.1% on the current stock price of kr097.38. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
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. Fortunately Telefonaktiebolaget LM Ericsson's payout ratio is modest, at just 41% of profit. A useful secondary check can be to evaluate whether Telefonaktiebolaget LM Ericsson generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 33% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
See our latest analysis for Telefonaktiebolaget LM Ericsson
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Telefonaktiebolaget LM Ericsson earnings per share are up 7.4% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Telefonaktiebolaget LM Ericsson's dividend payments per share have declined at 2.1% per year on average over the past 10 years, which is uninspiring. Telefonaktiebolaget LM Ericsson is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
Final Takeaway
Is Telefonaktiebolaget LM Ericsson worth buying for its dividend? Earnings per share have been growing moderately, and Telefonaktiebolaget LM Ericsson is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Telefonaktiebolaget LM Ericsson is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Telefonaktiebolaget LM Ericsson, and we would prioritise taking a closer look at it.
So while Telefonaktiebolaget LM Ericsson looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, Telefonaktiebolaget LM Ericsson has 2 warning signs (and 1 which is concerning) we think you should know about.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.