Is Bicicletas Monark S.A. (BVMF:BMKS3) A Strong Dividend Stock?

By
Simply Wall St
Published
March 15, 2021
BOVESPA:BMKS3
Source: Shutterstock

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 slim 2.6% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Bicicletas Monark could have potential. Some simple analysis can reduce the risk of holding Bicicletas Monark for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

historic-dividend
BOVESPA:BMKS3 Historic Dividend March 16th 2021

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Bicicletas Monark paid out 68% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Bicicletas Monark paid out 98% of its free cash flow last year, which we think is concerning if cash flows do not improve. 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. Cash is king, as they say, and were Bicicletas Monark to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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.

We update our data on Bicicletas Monark every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. 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. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was R$24.5 in 2011, compared to R$6.1 last year. This works out to a decline of approximately 75% over that time.

We struggle to make a case for buying Bicicletas Monark for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Bicicletas Monark's EPS have fallen by approximately 19% per year during the past five years. 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

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. 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. Earnings per share are down, and Bicicletas Monark's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Bicicletas Monark looks quite suboptimal from a dividend investment perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Bicicletas Monark has 6 warning signs (and 1 which is potentially serious) we think you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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