Don't Race Out To Buy UPM-Kymmene Oyj (HEL:UPM) Just Because It's Going Ex-Dividend

UPM-Kymmene Oyj (HEL:UPM) stock is about to trade ex-dividend in 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Thus, you can purchase UPM-Kymmene Oyj's shares before the 30th of October in order to receive the dividend, which the company will pay on the 7th of November.

The company's next dividend payment will be €0.75 per share. Last year, in total, the company distributed €1.50 to shareholders. Based on the last year's worth of payments, UPM-Kymmene Oyj stock has a trailing yield of around 5.2% on the current share price of €28.96. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether UPM-Kymmene Oyj can afford its dividend, and if the dividend could grow.

Check out our latest analysis for UPM-Kymmene Oyj

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. UPM-Kymmene Oyj paid out 185% 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 97% of its free cash flow in the form of dividends last year, which is outside the comfort zone 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.

Cash is slightly more important than profit from a dividend perspective, but given UPM-Kymmene 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 the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by UPM-Kymmene Oyj's 22% 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.

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, UPM-Kymmene Oyj has lifted its dividend by approximately 9.6% a year on average. 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 a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid UPM-Kymmene Oyj? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (185%) 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. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering UPM-Kymmene Oyj as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 3 warning signs for UPM-Kymmene Oyj (1 is significant!) that you ought to be aware of before buying the 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.