Dividend Investors: Don't Be Too Quick To Buy Elekta AB (publ) (STO:EKTA B) For Its Upcoming Dividend

It looks like Elekta AB (publ) (STO:EKTA B) is about to go ex-dividend in the next 3 days. 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. 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. Thus, you can purchase Elekta's shares before the 5th of September in order to receive the dividend, which the company will pay on the 11th of September.

The company's next dividend payment will be kr01.20 per share, and in the last 12 months, the company paid a total of kr2.40 per share. Calculating the last year's worth of payments shows that Elekta has a trailing yield of 5.1% on the current share price of kr047.04. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. An unusually high payout ratio of 335% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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 58% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Elekta's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Check out our latest analysis for Elekta

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Elekta's earnings per share have dropped 24% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Elekta has lifted its dividend by approximately 17% 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. Elekta is already paying out 335% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Elekta an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. What's more, Elekta is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Elekta.

With that in mind though, if the poor dividend characteristics of Elekta don't faze you, it's worth being mindful of the risks involved with this business. For example - Elekta has 4 warning signs we think you should be aware of.

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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.