We Wouldn't Be Too Quick To Buy Nolato AB (publ) (STO:NOLA B) Before It Goes Ex-Dividend

Nolato AB (publ) (STO:NOLA B) is about to trade ex-dividend in the next three 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 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 Nolato's shares on or after the 7th of May will not receive the dividend, which will be paid on the 14th of May.

The company's next dividend payment will be kr01.50 per share, and in the last 12 months, the company paid a total of kr1.50 per share. Last year's total dividend payments show that Nolato has a trailing yield of 2.8% on the current share price of kr054.35. If you buy this business for its dividend, you should have an idea of whether Nolato's dividend is reliable and sustainable. So we need to investigate whether Nolato can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Nolato

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Nolato paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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 past year it paid out 146% 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.

Cash is slightly more important than profit from a dividend perspective, but given Nolato'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?

When earnings decline, dividend companies become much harder to analyse and own safely. 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 Nolato's 10% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Nolato has lifted its dividend by approximately 6.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Nolato is already paying out 93% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Nolato worth buying for its dividend? Not only are earnings per share declining, but Nolato is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Nolato.

Although, if you're still interested in Nolato and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for Nolato you should be aware of.

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.