Here's Why We're Wary Of Buying Lassila & Tikanoja Oyj's (HEL:LAT1V) For Its Upcoming Dividend

Lassila & Tikanoja Oyj (HEL:LAT1V) stock is about to trade ex-dividend in three days. This means that investors who purchase shares on or after the 19th of March will not receive the dividend, which will be paid on the 29th of March.

Lassila & Tikanoja Oyj's next dividend payment will be €0.40 per share, on the back of last year when the company paid a total of €0.40 to shareholders. Calculating the last year's worth of payments shows that Lassila & Tikanoja Oyj has a trailing yield of 2.8% on the current share price of €14.32. 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! We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Lassila & Tikanoja Oyj

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 80% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Lassila & Tikanoja Oyj generated enough free cash flow to afford its dividend. The company paid out 92% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Lassila & Tikanoja Oyj paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Lassila & Tikanoja Oyj to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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 earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Lassila & Tikanoja Oyj's earnings per share have dropped 13% 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Lassila & Tikanoja Oyj has seen its dividend decline 3.1% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Has Lassila & Tikanoja Oyj got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think Lassila & Tikanoja Oyj is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Lassila & Tikanoja Oyj despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Lassila & Tikanoja Oyj has 3 warning signs we think you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you decide to trade Lassila & Tikanoja Oyj, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.