Dividend Investors: Don't Be Too Quick To Buy Koninklijke Philips N.V. (AMS:PHIA) For Its Upcoming Dividend

Koninklijke Philips N.V. (AMS:PHIA) is about to trade ex-dividend in the next four days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. In other words, investors can purchase Koninklijke Philips' shares before the 14th of May in order to be eligible for the dividend, which will be paid on the 3rd of June.

The company's next dividend payment will be €0.85 per share. Last year, in total, the company distributed €0.85 to shareholders. Last year's total dividend payments show that Koninklijke Philips has a trailing yield of 4.0% on the current share price of €21.43. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

We've discovered 3 warning signs about Koninklijke Philips. View them for free.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Koninklijke Philips reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. 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. The good news is it paid out just 0.7% of its free cash flow in the last year.

See our latest analysis for Koninklijke Philips

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Koninklijke Philips's 24% 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Koninklijke Philips has increased its dividend at approximately 1.3% a year on average.

Final Takeaway

Has Koninklijke Philips got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out -94% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think Koninklijke Philips is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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 Koninklijke Philips. For example, we've found 3 warning signs for Koninklijke Philips (2 make us uncomfortable!) that deserve your attention before investing in the shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.