Consider This Before Buying Bicicletas Monark S.A. (BVMF:BMKS3) For The 2.6% Dividend

Today we'll take a closer look at Bicicletas Monark S.A. (BVMF:BMKS3) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 2.6% yield is nothing to get excited about, but investors probably think the long payment history suggests Bicicletas Monark has some staying power. There are a few simple ways to reduce the risks of buying Bicicletas Monark for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Bicicletas Monark!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Bicicletas Monark paid out 68% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 98%, Bicicletas Monark's dividend payments are poorly covered by cash flow. While Bicicletas Monark's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Bicicletas Monark's ability to maintain its dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Bicicletas Monark's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Bicicletas Monark's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Bicicletas Monark has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was R$24.5 in 2010, compared to R$6.1 last year. This works out to a decline of approximately 75% over that time.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though Bicicletas Monark's EPS have declined at around 19% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Bicicletas Monark's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Bicicletas Monark's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Bicicletas Monark gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Bicicletas Monark looks quite suboptimal from a dividend investment perspective.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 5 warning signs for Bicicletas Monark (1 is concerning!) that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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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