It Might Not Be A Great Idea To Buy NP3 Fastigheter AB (publ) (STO:NP3) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see NP3 Fastigheter AB (publ) (STO:NP3) is about to trade ex-dividend in the next 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase NP3 Fastigheter's shares before the 30th of July in order to receive the dividend, which the company will pay on the 5th of August.

The company's upcoming dividend is kr00.50 a share, following on from the last 12 months, when the company distributed a total of kr5.47 per share to shareholders. Based on the last year's worth of payments, NP3 Fastigheter stock has a trailing yield of around 2.1% on the current share price of kr0262.50. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether NP3 Fastigheter has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for NP3 Fastigheter

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. NP3 Fastigheter distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 35% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and NP3 Fastigheter fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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 fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by NP3 Fastigheter's 11% 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, nine years ago, NP3 Fastigheter has lifted its dividend by approximately 30% 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. NP3 Fastigheter is already paying out 119% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Has NP3 Fastigheter got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 119% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in NP3 Fastigheter's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think NP3 Fastigheter is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in NP3 Fastigheter and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 3 warning signs for NP3 Fastigheter (1 can't be ignored) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com