Here's Why We're Wary Of Buying Telefonaktiebolaget LM Ericsson's (STO:ERIC B) For Its Upcoming Dividend

Readers hoping to buy Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase Telefonaktiebolaget LM Ericsson's shares before the 1st of October to receive the dividend, which will be paid on the 7th of October.

The company's next dividend payment will be kr01.35 per share, on the back of last year when the company paid a total of kr2.70 to shareholders. Calculating the last year's worth of payments shows that Telefonaktiebolaget LM Ericsson has a trailing yield of 3.4% on the current share price of kr078.38. 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.

Check out our latest analysis for Telefonaktiebolaget LM Ericsson

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Telefonaktiebolaget LM Ericsson paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Thankfully its dividend payments took up just 35% of the free cash flow it generated, which is a comfortable payout ratio.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Telefonaktiebolaget LM Ericsson reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Telefonaktiebolaget LM Ericsson has seen its dividend decline 1.0% per annum on average over the past 10 years, which is not great to see.

Remember, you can always get a snapshot of Telefonaktiebolaget LM Ericsson's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Telefonaktiebolaget LM Ericsson? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." Bottom line: Telefonaktiebolaget LM Ericsson has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Telefonaktiebolaget LM Ericsson. Our analysis shows 1 warning sign for Telefonaktiebolaget LM Ericsson and you should be aware of this before buying any shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.