Telefonaktiebolaget LM Ericsson (STO:ERIC B) Has Announced A Dividend Of SEK1.35

The board of Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) has announced that it will pay a dividend of SEK1.35 per share on the 7th of October. This means the annual payment is 3.7% of the current stock price, which is above the average for the industry.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Telefonaktiebolaget LM Ericsson's stock price has increased by 31% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

Check out our latest analysis for Telefonaktiebolaget LM Ericsson

Telefonaktiebolaget LM Ericsson's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Even though Telefonaktiebolaget LM Ericsson isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.

Analysts expect a massive rise in earnings per share in the next year. If the dividend extends its recent trend, estimates say the dividend could reach 3.9%, which we would be comfortable to see continuing.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was SEK3.00 in 2014, and the most recent fiscal year payment was SEK2.70. Doing the maths, this is a decline of about 1.0% per year. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Dividend Has Limited Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings per share has been sinking by 25% over the last five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Telefonaktiebolaget LM Ericsson's Dividend Doesn't Look Sustainable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Telefonaktiebolaget LM Ericsson that you should be aware of before investing. Is Telefonaktiebolaget LM Ericsson not quite the opportunity you were looking for? Why not check out 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.

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