We Wouldn't Be Too Quick To Buy Nokian Renkaat Oyj (HEL:TYRES) Before It Goes Ex-Dividend

It looks like Nokian Renkaat Oyj (HEL:TYRES) is about to go ex-dividend in the next 3 days. You will need to purchase shares before the 31st of March to receive the dividend, which will be paid on the 15th of April.

Nokian Renkaat Oyj's upcoming dividend is €0.60 a share, following on from the last 12 months, when the company distributed a total of €1.20 per share to shareholders. Based on the last year's worth of payments, Nokian Renkaat Oyj stock has a trailing yield of around 4.0% on the current share price of €30.04. 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 Nokian Renkaat Oyj

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. Nokian Renkaat Oyj paid out 193% 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 56% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Nokian Renkaat Oyj's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Nokian Renkaat Oyj's earnings per share have dropped 19% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

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, Nokian Renkaat Oyj has lifted its dividend by approximately 6.3% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Nokian Renkaat Oyj is already paying out 193% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Should investors buy Nokian Renkaat Oyj for the upcoming dividend? Earnings per share have been shrinking in recent times. Worse, Nokian Renkaat Oyj's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Nokian Renkaat Oyj and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 2 warning signs for Nokian Renkaat Oyj that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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