Vulcabras S.A. (BVMF:VULC3) Passed Our Checks, And It's About To Pay A R$0.125 Dividend

It looks like Vulcabras S.A. (BVMF:VULC3) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Vulcabras investors that purchase the stock on or after the 20th of September will not receive the dividend, which will be paid on the 1st of October.

The company's next dividend payment will be R$0.125 per share. Last year, in total, the company distributed R$1.60 to shareholders. Looking at the last 12 months of distributions, Vulcabras has a trailing yield of approximately 8.9% on its current stock price of R$17.88. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Vulcabras

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Vulcabras is paying out an acceptable 67% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Vulcabras generated enough free cash flow to afford its dividend. Over the past year it paid out 170% 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 Vulcabras'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. Cash is king, as they say, and were Vulcabras to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Vulcabras has grown its earnings rapidly, up 24% 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.

We'd also point out that Vulcabras 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past three years, Vulcabras has increased its dividend at approximately 66% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Should investors buy Vulcabras for the upcoming dividend? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 170% of its cashflow, which is uncomfortably high. Overall, it's hard to get excited about Vulcabras from a dividend perspective.

With that being said, if dividends aren't your biggest concern with Vulcabras, you should know about the other risks facing this business. Case in point: We've spotted 2 warning signs for Vulcabras you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.