Is It Smart To Buy Alfa Laval Corporate AB (STO:ALFA) Before It Goes Ex-Dividend?

Alfa Laval Corporate AB (STO:ALFA) is about to trade ex-dividend in the next 4 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. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Alfa Laval's shares before the 26th of April in order to receive the dividend, which the company will pay on the 3rd of May.

The company's next dividend payment will be kr07.50 per share. Last year, in total, the company distributed kr7.50 to shareholders. Based on the last year's worth of payments, Alfa Laval has a trailing yield of 1.8% on the current stock price of kr0420.50. If you buy this business for its dividend, you should have an idea of whether Alfa Laval's dividend is reliable and sustainable. So we need to investigate whether Alfa Laval can afford its dividend, and if the dividend could grow.

View our latest analysis for Alfa Laval

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. That's why it's good to see Alfa Laval paying out a modest 49% of its earnings. A useful secondary check can be to evaluate whether Alfa Laval generated enough free cash flow to afford its dividend. It distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Alfa Laval earnings per share are up 7.3% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

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, Alfa Laval has lifted its dividend by approximately 7.2% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Alfa Laval an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Alfa Laval is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Alfa Laval is halfway there. Alfa Laval looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

So while Alfa Laval looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Every company has risks, and we've spotted 1 warning sign for Alfa Laval 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.