Read This Before Considering Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) For Its Upcoming kr1.35 Dividend

Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) stock is about to trade ex-dividend in three 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. Accordingly, Telefonaktiebolaget LM Ericsson investors that purchase the stock on or after the 28th of September will not receive the dividend, which will be paid on the 4th of October.

The company's next dividend payment will be kr1.35 per share, on the back of last year when the company paid a total of kr2.70 to shareholders. Based on the last year's worth of payments, Telefonaktiebolaget LM Ericsson stock has a trailing yield of around 4.7% on the current share price of SEK56.96. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Telefonaktiebolaget LM Ericsson

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Telefonaktiebolaget LM Ericsson paid out more than half (74%) 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 95% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

While Telefonaktiebolaget LM Ericsson'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 Telefonaktiebolaget LM Ericsson 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 in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Telefonaktiebolaget LM Ericsson's earnings have been skyrocketing, up 56% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Telefonaktiebolaget LM Ericsson's dividend payments are effectively flat on where they were 10 years ago.

To Sum It Up

Should investors buy Telefonaktiebolaget LM Ericsson for the upcoming dividend? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 95% of its cashflow, which is uncomfortably high. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

If you want to look further into Telefonaktiebolaget LM Ericsson, it's worth knowing the risks this business faces. For example - Telefonaktiebolaget LM Ericsson has 3 warning signs we think you should be aware of.

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.