It Might Not Be A Great Idea To Buy FLSmidth & Co. A/S (CPH:FLS) For Its Next Dividend

FLSmidth & Co. A/S (CPH:FLS) is about to trade ex-dividend in the next 4 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. Thus, you can purchase FLSmidth's shares before the 11th of April in order to receive the dividend, which the company will pay on the 15th of April.

The company's upcoming dividend is kr.4.00 a share, following on from the last 12 months, when the company distributed a total of kr.4.00 per share to shareholders. Last year's total dividend payments show that FLSmidth has a trailing yield of 1.1% on the current share price of kr.360.60. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for FLSmidth

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That's why it's good to see FLSmidth paying out a modest 33% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. FLSmidth paid out more free cash flow than it generated - 137%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

FLSmidth paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to FLSmidth's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see FLSmidth's earnings per share have dropped 6.2% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, FLSmidth has increased its dividend at approximately 7.2% a year on average.

To Sum It Up

Is FLSmidth worth buying for its dividend? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though FLSmidth is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not that we think FLSmidth is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering FLSmidth as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 1 warning sign for FLSmidth and you should be aware of it 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.