Dividend Investors: Don't Be Too Quick To Buy UPM-Kymmene Oyj (HEL:UPM) For Its Upcoming Dividend

Readers hoping to buy UPM-Kymmene Oyj (HEL:UPM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, UPM-Kymmene Oyj investors that purchase the stock on or after the 28th of March will not receive the dividend, which will be paid on the 8th of April.

The company's upcoming dividend is €0.75 a share, following on from the last 12 months, when the company distributed a total of €1.50 per share to shareholders. Last year's total dividend payments show that UPM-Kymmene Oyj has a trailing yield of 5.7% on the current share price of €26.49. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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. UPM-Kymmene Oyj paid out 183% 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. 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. It paid out 106% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given UPM-Kymmene Oyj's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

View our latest analysis for UPM-Kymmene Oyj

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by UPM-Kymmene Oyj's 16% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. UPM-Kymmene Oyj has delivered 7.9% dividend growth per year on average over the past 10 years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. UPM-Kymmene Oyj is already paying out 183% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is UPM-Kymmene Oyj worth buying for its dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (183%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of UPM-Kymmene Oyj.

With that in mind though, if the poor dividend characteristics of UPM-Kymmene Oyj don't faze you, it's worth being mindful of the risks involved with this business. Be aware that UPM-Kymmene Oyj is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.