Why It Might Not Make Sense To Buy Telefônica Brasil S.A. (BVMF:VIVT3) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Telefônica Brasil S.A. (BVMF:VIVT3) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 1st of March will not receive this dividend, which will be paid on the 31st of July.

Telefônica Brasil's next dividend payment will be R$0.076 per share, and in the last 12 months, the company paid a total of R$1.90 per share. Based on the last year's worth of payments, Telefônica Brasil stock has a trailing yield of around 4.2% on the current share price of R$45.11. 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! So we need to investigate whether Telefônica Brasil can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Telefônica Brasil

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Telefônica Brasil paid out 110% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (56%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Telefônica Brasil fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Telefônica Brasil's 8.5% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Telefônica Brasil has seen its dividend decline 3.5% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Should investors buy Telefônica Brasil for the upcoming dividend? Earnings per share have been in decline, which is not encouraging. What's more, Telefônica Brasil is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think Telefônica Brasil is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Telefônica Brasil and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 1 warning sign with Telefônica Brasil and understanding them should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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