Is It Worth Considering Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) For Its Upcoming Dividend?

Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Companhia de Saneamento de Minas Gerais' shares on or after the 29th of April, you won't be eligible to receive the dividend, when it is paid on the 10th of May.

The company's next dividend payment will be R$0.7911779 per share. Last year, in total, the company distributed R$1.68 to shareholders. Based on the last year's worth of payments, Companhia de Saneamento de Minas Gerais stock has a trailing yield of around 7.8% on the current share price of R$21.49. If you buy this business for its dividend, you should have an idea of whether Companhia de Saneamento de Minas Gerais's dividend is reliable and sustainable. As a result, readers should always check whether Companhia de Saneamento de Minas Gerais has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Companhia de Saneamento de Minas Gerais

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. Fortunately Companhia de Saneamento de Minas Gerais's payout ratio is modest, at just 46% of profit. 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. The company paid out 101% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

While Companhia de Saneamento de Minas Gerais'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 Companhia de Saneamento de Minas Gerais 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?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Companhia de Saneamento de Minas Gerais's earnings per share have risen 19% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Companhia de Saneamento de Minas Gerais has lifted its dividend by approximately 16% 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 Companhia de Saneamento de Minas Gerais for the upcoming dividend? We like that Companhia de Saneamento de Minas Gerais has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

While it's tempting to invest in Companhia de Saneamento de Minas Gerais for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 2 warning signs with Companhia de Saneamento de Minas Gerais and understanding them should be part of your investment process.

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.