Dividend Investors: Don't Be Too Quick To Buy Evonik Industries AG (ETR:EVK) For Its Upcoming Dividend

Evonik Industries AG (ETR:EVK) is about to trade ex-dividend in the next 2 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Evonik Industries' shares before the 29th of May in order to be eligible for the dividend, which will be paid on the 3rd of June.

The company's next dividend payment will be €1.17 per share, on the back of last year when the company paid a total of €1.17 to shareholders. Based on the last year's worth of payments, Evonik Industries stock has a trailing yield of around 5.9% on the current share price of €20.00. If you buy this business for its dividend, you should have an idea of whether Evonik Industries's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Our free stock report includes 2 warning signs investors should be aware of before investing in Evonik Industries. Read for free now.

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. Evonik Industries paid out 182% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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 58% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Evonik Industries fortunately did generate enough cash to fund its dividend. 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.

Check out our latest analysis for Evonik Industries

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Evonik Industries's 17% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Evonik Industries has delivered 1.6% dividend growth per year on average over the past 10 years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Evonik Industries? Earnings per share have been shrinking in recent times. Additionally, Evonik Industries is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Evonik Industries as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Evonik Industries and you should be aware of them before buying any shares.

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.