Don't Buy Svenska Cellulosa Aktiebolaget SCA (publ) (STO:SCA B) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Svenska Cellulosa Aktiebolaget SCA (publ) (STO:SCA B) is about to go ex-dividend in just 4 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. 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. Meaning, you will need to purchase Svenska Cellulosa Aktiebolaget's shares before the 7th of April to receive the dividend, which will be paid on the 11th of April.

The company's next dividend payment will be kr03.00 per share. Last year, in total, the company distributed kr3.00 to shareholders. Based on the last year's worth of payments, Svenska Cellulosa Aktiebolaget stock has a trailing yield of around 2.2% on the current share price of kr0133.55. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Svenska Cellulosa Aktiebolaget can afford its dividend, and if the dividend could grow.

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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. Svenska Cellulosa Aktiebolaget paid out 58% of its earnings to investors last year, a normal payout level for most businesses. 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 147% 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.

Svenska Cellulosa Aktiebolaget paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Svenska Cellulosa Aktiebolaget's ability to maintain its dividend.

Check out our latest analysis for Svenska Cellulosa Aktiebolaget

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. 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 Svenska Cellulosa Aktiebolaget's 25% 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. Svenska Cellulosa Aktiebolaget's dividend payments per share have declined at 5.4% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Should investors buy Svenska Cellulosa Aktiebolaget for the upcoming dividend? Svenska Cellulosa Aktiebolaget had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Svenska Cellulosa Aktiebolaget is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Svenska Cellulosa Aktiebolaget and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 2 warning signs for Svenska Cellulosa Aktiebolaget 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.