It Might Not Be A Great Idea To Buy Svenska Cellulosa Aktiebolaget SCA (publ) (STO:SCA B) For Its Next Dividend

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 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase Svenska Cellulosa Aktiebolaget's shares on or after the 25th of March will not receive the dividend, which will be paid on the 2nd of April.

The company's next dividend payment will be kr02.75 per share, on the back of last year when the company paid a total of kr2.75 to shareholders. Calculating the last year's worth of payments shows that Svenska Cellulosa Aktiebolaget has a trailing yield of 1.8% on the current share price of kr0156.55. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Svenska Cellulosa Aktiebolaget

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 more than half (53%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out an unsustainably high 231% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While Svenska Cellulosa Aktiebolaget's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Svenska Cellulosa Aktiebolaget to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Svenska Cellulosa Aktiebolaget's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Svenska Cellulosa Aktiebolaget has seen its dividend decline 5.3% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Is Svenska Cellulosa Aktiebolaget an attractive dividend stock, or better left on the shelf? Svenska Cellulosa Aktiebolaget is paying out a reasonable percentage of its income yet an uncomfortably high 231% of its cash flow as dividends. What's more, earnings have barely grown. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Svenska Cellulosa Aktiebolaget despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for Svenska Cellulosa Aktiebolaget 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.