Dividend Investors: Don't Be Too Quick To Buy Danone S.A. (EPA:BN) For Its Upcoming Dividend

It looks like Danone S.A. (EPA:BN) is about to go ex-dividend in the next 4 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 as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Danone's shares before the 4th of May in order to be eligible for the dividend, which will be paid on the 6th of May. The company's next dividend payment will be €2.25 per share, on the back of last year when the company paid a total of €2.25 to shareholders. Last year's total dividend payments show that Danone has a trailing yield of 3.3% on the current share price of €67.40. 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. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. 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. It paid out 80% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Danone generated enough free cash flow to afford its dividend. Dividends consumed 51% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations. It's positive to see that Danone'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. See our latest analysis for Danone Click here to see the company's payout ratio, plus analyst estimates of its future dividends. Have Earnings And Dividends Been Growing? Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Danone's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Danone has lifted its dividend by approximately 4.1% a year on average. Final Takeaway Should investors buy Danone for the upcoming dividend? Danone has been unable to generate earnings growth, but at least its dividend looks sustainable, with its profit and cashflow payout ratios within reasonable limits. Bottom line: Danone has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors. With that being said, if you're still considering Danone as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 2 warning signs for Danone you should know about. If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.