Why It Might Not Make Sense To Buy Sanofi (EPA:SAN) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sanofi (EPA:SAN) is about to trade ex-dividend in the next four days. 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. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Sanofi's shares before the 5th of May in order to receive the dividend, which the company will pay on the 7th of May. The company's upcoming dividend is €4.12 a share, following on from the last 12 months, when the company distributed a total of €4.12 per share to shareholders. Last year's total dividend payments show that Sanofi has a trailing yield of 5.3% on the current share price of €78.32. 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 investigate whether Sanofi can afford its dividend, and if the dividend could grow. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. 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. Sanofi paid out 102% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Sanofi generated enough free cash flow to afford its dividend. Dividends consumed 70% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Sanofi fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits. Check out our latest analysis for Sanofi Click here to see the company's payout ratio, plus analyst estimates of its future dividends. Have Earnings And Dividends Been Growing? Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Sanofi's earnings per share have fallen at approximately 16% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks. Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Sanofi has lifted its dividend by approximately 3.8% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Sanofi is already paying out 102% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future. To Sum It Up Is Sanofi an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. Worse, Sanofi's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Sanofi. Although, if you're still interested in Sanofi and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 2 warning signs with Sanofi and understanding them should be part of your investment process. If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.