It Might Not Be A Great Idea To Buy Empreendimentos Pague Menos S.A. (BVMF:PGMN3) For Its Next Dividend

It looks like Empreendimentos Pague Menos S.A. (BVMF:PGMN3) is about to go ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Empreendimentos Pague Menos investors that purchase the stock on or after the 29th of January will not receive the dividend, which will be paid on the 6th of March.

The upcoming dividend for Empreendimentos Pague Menos will put a total of R$0.25 per share in shareholders' pockets, up from last year's total dividends of R$0.19. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Empreendimentos Pague Menos

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Empreendimentos Pague Menos lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Empreendimentos Pague Menos didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year, it paid out dividends equivalent to 211% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Empreendimentos Pague Menos intends to continue funding this dividend, or if it could be forced to cut the payment.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Empreendimentos Pague Menos reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

We'd also point out that Empreendimentos Pague Menos 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.

Given that Empreendimentos Pague Menos has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Remember, you can always get a snapshot of Empreendimentos Pague Menos's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Should investors buy Empreendimentos Pague Menos for the upcoming dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." It's not that we think Empreendimentos Pague Menos is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Empreendimentos Pague Menos don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 4 warning signs for Empreendimentos Pague Menos (2 can't be ignored) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.