Why It Might Not Make Sense To Buy NP3 Fastigheter AB (publ) (STO:NP3) For Its Upcoming Dividend

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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase NP3 Fastigheter's shares before the 30th of October in order to be eligible for the dividend, which will be paid on the 5th of November.

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. Looking at the last 12 months of distributions, NP3 Fastigheter has a trailing yield of approximately 2.1% on its current stock price of kr0256.00. If you buy this business for its dividend, you should have an idea of whether NP3 Fastigheter's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for NP3 Fastigheter

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. NP3 Fastigheter paid out 95% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Fortunately, it paid out only 28% of its free cash flow in the past year.

It's good to see that while NP3 Fastigheter's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. NP3 Fastigheter's earnings per share have fallen at approximately 7.6% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

NP3 Fastigheter also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, NP3 Fastigheter has lifted its dividend by approximately 27% 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 a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Should investors buy NP3 Fastigheter for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 95% of its profit as dividends, which we feel is uncomfortably high. 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. Every company has risks, and we've spotted 4 warning signs for NP3 Fastigheter (of which 1 makes us a bit uncomfortable!) you should know about.

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.