Does Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Have A Place In Your Dividend Portfolio?

Is Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With Companhia de Saneamento de Minas Gerais yielding 3.4% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Some simple research can reduce the risk of buying Companhia de Saneamento de Minas Gerais for its dividend - read on to learn more.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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, Companhia de Saneamento de Minas Gerais paid out 10% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 74% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Companhia de Saneamento de Minas Gerais has available to meet other needs. It's positive to see that Companhia de Saneamento de Minas Gerais' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Consider getting our latest analysis on Companhia de Saneamento de Minas Gerais' financial position here.

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. For the purpose of this article, we only scrutinise the last decade of Companhia de Saneamento de Minas Gerais' dividend 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$0.7 in 2011, compared to R$0.6 last year. The dividend has shrunk at around 1.6% a year during that period. Companhia de Saneamento de Minas Gerais' dividend has been cut sharply at least once, so it hasn't fallen by 1.6% every year, but this is a decent approximation of the long term change.

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

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Companhia de Saneamento de Minas Gerais has grown its earnings per share at 26% per annum over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly - an ideal combination.

Conclusion

To summarise, shareholders should always check that Companhia de Saneamento de Minas Gerais' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Above all, we're glad to see that Companhia de Saneamento de Minas Gerais pays out a low fraction of its earnings and, while it paid a higher percentage of cashflow, this also was within a normal range. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Overall we think Companhia de Saneamento de Minas Gerais is an interesting dividend stock, although it could be better.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Companhia de Saneamento de Minas Gerais that investors need to be conscious of moving forward.

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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