It Might Not Be A Great Idea To Buy Nestlé S.A. (VTX:NESN) For Its Next Dividend

It looks like Nestlé S.A. (VTX:NESN) is about to go ex-dividend in the next four 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 important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Nestlé's shares before the 22nd of April in order to be eligible for the dividend, which will be paid on the 24th of April.

The company's next dividend payment will be CHF03.05 per share, on the back of last year when the company paid a total of CHF3.05 to shareholders. Last year's total dividend payments show that Nestlé has a trailing yield of 3.5% on the current share price of CHF086.80. If you buy this business for its dividend, you should have an idea of whether Nestlé's dividend is reliable and sustainable. As a result, readers should always check whether Nestlé has been able to grow its dividends, or if the dividend might be cut.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Nestlé paid out more than half (73%) of its earnings last year, which is a regular payout ratio for most companies. 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. Dividends consumed 73% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Nestlé's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

View our latest analysis for Nestlé

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we're not overly excited about Nestlé's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Nestlé has delivered an average of 3.6% per year annual increase in its dividend, based on the past 10 years of dividend payments.

The Bottom Line

Should investors buy Nestlé for the upcoming dividend? Nestlé has been unable to generate earnings growth, but at least its dividend looks sustainable, with its profit and cashflow payout ratios within reasonable limits. It's not that we think Nestlé is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Nestlé and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for Nestlé you should be aware of.

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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.