It Might Not Be A Great Idea To Buy Ericsson Nikola Tesla d.d. (ZGSE:ERNT) For Its Next Dividend

Readers hoping to buy Ericsson Nikola Tesla d.d. (ZGSE:ERNT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible 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. Thus, you can purchase Ericsson Nikola Tesla d.d's shares before the 1st of July in order to receive the dividend, which the company will pay on the 23rd of July.

The company's next dividend payment will be €10.54 per share, and in the last 12 months, the company paid a total of €10.54 per share. Looking at the last 12 months of distributions, Ericsson Nikola Tesla d.d has a trailing yield of approximately 5.3% on its current stock price of €200.00. If you buy this business for its dividend, you should have an idea of whether Ericsson Nikola Tesla d.d's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 90% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out dividends equivalent to 209% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Ericsson Nikola Tesla d.d intends to continue funding this dividend, or if it could be forced to cut the payment.

Ericsson Nikola Tesla d.d 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.

Ericsson Nikola Tesla d.d 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 Ericsson Nikola Tesla d.d to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

See our latest analysis for Ericsson Nikola Tesla d.d

Click here to see how much of its profit Ericsson Nikola Tesla d.d paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Ericsson Nikola Tesla d.d's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Ericsson Nikola Tesla d.d's dividend payments per share have declined at 1.0% per year on average over the past 10 years, which is uninspiring.

Final Takeaway

Has Ericsson Nikola Tesla d.d got what it takes to maintain its dividend payments? In addition to earnings being flat, Ericsson Nikola Tesla d.d is paying out a reasonable percentage of its earnings as profits. However, the dividend was not well covered by free cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Ericsson Nikola Tesla d.d don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 2 warning signs for Ericsson Nikola Tesla d.d (1 doesn't sit too well with us!) that deserve your attention before investing in the shares.

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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.