It Might Not Be A Great Idea To Buy Elisa Oyj (HEL:ELISA) For Its Next Dividend

Elisa Oyj (HEL:ELISA) stock is about to trade ex-dividend in three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Elisa Oyj's shares on or after the 15th of April, you won't be eligible to receive the dividend, when it is paid on the 23rd of April.

The company's next dividend payment will be €1.13 per share, and in the last 12 months, the company paid a total of €2.25 per share. Based on the last year's worth of payments, Elisa Oyj has a trailing yield of 5.2% on the current stock price of €42.88. If you buy this business for its dividend, you should have an idea of whether Elisa Oyj's dividend is reliable and sustainable. So we need to investigate whether Elisa Oyj can afford its dividend, and if the dividend could grow.

See our latest analysis for Elisa Oyj

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Elisa Oyj paid out 96% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Elisa Oyj generated enough free cash flow to afford its dividend. It paid out 100% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given Elisa Oyj's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Elisa Oyj, with earnings per share up 3.4% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Elisa Oyj is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Elisa Oyj has lifted its dividend by approximately 5.6% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Elisa Oyj worth buying for its dividend? Elisa Oyj is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. Bottom line: Elisa Oyj has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Elisa Oyj don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 2 warning signs for Elisa Oyj (1 doesn't sit too well with us) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.