Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) Looks Interesting, And It's About To Pay A 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 two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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 Telefonaktiebolaget LM Ericsson's shares on or after the 26th of September will not receive the dividend, which will be paid on the 2nd of October.

The company's next dividend payment will be kr01.42 per share, and in the last 12 months, the company paid a total of kr2.85 per share. Looking at the last 12 months of distributions, Telefonaktiebolaget LM Ericsson has a trailing yield of approximately 3.7% on its current stock price of kr076.18. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

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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. Telefonaktiebolaget LM Ericsson paid out more than half (55%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 25% of its cash flow last year.

It's positive to see that Telefonaktiebolaget LM Ericsson's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Check out our latest analysis for Telefonaktiebolaget LM Ericsson

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Telefonaktiebolaget LM Ericsson's earnings have been skyrocketing, up 51% per annum for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Telefonaktiebolaget LM Ericsson could have strong prospects for future increases to the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Telefonaktiebolaget LM Ericsson's dividend payments per share have declined at 1.7% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

From a dividend perspective, should investors buy or avoid Telefonaktiebolaget LM Ericsson? Telefonaktiebolaget LM Ericsson's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. Overall we think this is an attractive combination and worthy of further research.

So while Telefonaktiebolaget LM Ericsson looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To that end, you should learn about the 3 warning signs we've spotted with Telefonaktiebolaget LM Ericsson (including 1 which can't be ignored).

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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.