Why It Might Not Make Sense To Buy Trainers' House Oyj (HEL:TRH1V) For Its Upcoming Dividend

Trainers' House Oyj (HEL:TRH1V) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Meaning, you will need to purchase Trainers' House Oyj's shares before the 18th of April to receive the dividend, which will be paid on the 26th of April.

The company's next dividend payment will be €0.26 per share. Last year, in total, the company distributed €0.47 to shareholders. Last year's total dividend payments show that Trainers' House Oyj has a trailing yield of 8.5% on the current share price of €5.5. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Trainers' House Oyj

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Trainers' House Oyj paid out 174% 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. A useful secondary check can be to evaluate whether Trainers' House Oyj generated enough free cash flow to afford its dividend. Over the past year it paid out 184% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Trainers' House Oyj does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Cash is slightly more important than profit from a dividend perspective, but given Trainers' House Oyj's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Trainers' House Oyj paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Trainers' House Oyj's earnings per share have been growing at 18% a year for the past five years. It's great to see earnings per share growing rapidly, but we're disturbed to see the company paid out 174% of its earnings last year. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Trainers' House Oyj has delivered 68% dividend growth per year on average over the past three years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Has Trainers' House Oyj got what it takes to maintain its dividend payments? While it's nice to see earnings per share growing, we're curious about how Trainers' House Oyj intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Trainers' House Oyj. We've identified 4 warning signs with Trainers' House Oyj (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.