Here's Why We're Wary Of Buying Enagás' (BME:ENG) For Its Upcoming Dividend

Enagás, S.A. (BME:ENG) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 7th of July will not receive this dividend, which will be paid on the 9th of July.

Enagás's upcoming dividend is €0.78 a share, following on from the last 12 months, when the company distributed a total of €1.60 per share to shareholders. Calculating the last year's worth of payments shows that Enagás has a trailing yield of 7.3% on the current share price of €22. If you buy this business for its dividend, you should have an idea of whether Enagás's dividend is reliable and sustainable. As a result, readers should always check whether Enagás has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Enagás

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. Last year Enagás paid out 96% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Over the last year it paid out 55% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Enagás's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Enagás'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.

We'd also point out that Enagás issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Enagás has delivered an average of 9.0% per year annual increase in its dividend, based on the past ten years of dividend payments.

The Bottom Line

Is Enagás worth buying for its dividend? The company has not generated any growth in earnings per share over the ten-year timeframe we measured. Plus, Enagás's paying out a high percentage of its earnings and more than half its cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Enagás.

With that in mind though, if the poor dividend characteristics of Enagás don't faze you, it's worth being mindful of the risks involved with this business. For example, Enagás has 4 warning signs (and 3 which make us uncomfortable) we think you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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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