Should You Buy Indústrias Romi S.A. (BVMF:ROMI3) For Its Upcoming Dividend?

It looks like Indústrias Romi S.A. (BVMF:ROMI3) is about to go ex-dividend in the next couple of days. If you purchase the stock on or after the 15th of December, you won't be eligible to receive this dividend, when it is paid on the 26th of January.

Indústrias Romi's next dividend payment will be R$0.85 per share, and in the last 12 months, the company paid a total of R$0.96 per share. Calculating the last year's worth of payments shows that Indústrias Romi has a trailing yield of 6.4% on the current share price of R$15.06. 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 check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Indústrias Romi

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. Indústrias Romi has a low and conservative payout ratio of just 15% of its income after tax. A useful secondary check can be to evaluate whether Indústrias Romi generated enough free cash flow to afford its dividend. Over the past year it paid out 118% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Indústrias Romi's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Indústrias Romi's ability to maintain its dividend.

Click here to see how much of its profit Indústrias Romi paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Indústrias Romi has grown its earnings rapidly, up 76% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Indústrias Romi has delivered 24% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Has Indústrias Romi got what it takes to maintain its dividend payments? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. In summary, while it has some positive characteristics, we're not inclined to race out and buy Indústrias Romi today.

While it's tempting to invest in Indústrias Romi for the dividends alone, you should always be mindful of the risks involved. For example - Indústrias Romi has 3 warning signs we think you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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