We Wouldn't Be Too Quick To Buy Ilkka Oyj (HEL:ILKKA2) Before It Goes Ex-Dividend

It looks like Ilkka Oyj (HEL:ILKKA2) is about to go ex-dividend in the next 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Ilkka Oyj's shares on or after the 26th of April will not receive the dividend, which will be paid on the 7th of May.

The company's next dividend payment will be €0.20 per share, on the back of last year when the company paid a total of €0.20 to shareholders. Looking at the last 12 months of distributions, Ilkka Oyj has a trailing yield of approximately 6.1% on its current stock price of €3.27. 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! As a result, readers should always check whether Ilkka Oyj has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Ilkka 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. Last year, Ilkka Oyj paid out 106% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Ilkka Oyj generated enough free cash flow to afford its dividend. Over the past year it paid out 159% 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.

Ilkka 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 Ilkka 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 Ilkka 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Ilkka Oyj's earnings per share have risen 19% per annum over the last five years. We're a bit put out by the fact that Ilkka Oyj paid out virtually all of its earnings and cashflow as dividends over the last year. Earnings are growing at a decent clip, so this payout ratio may prove sustainable, but it's not great to see.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Ilkka Oyj has delivered an average of 7.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Ilkka Oyj? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Ilkka Oyj.

Although, if you're still interested in Ilkka Oyj and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 3 warning signs for Ilkka Oyj (of which 1 can't be ignored!) you should know about.

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.