Is Equatorial Maranhão Distribuidora de Energia S.A. (BVMF:EQMA3B) A Good Fit For Your Dividend Portfolio?

Could Equatorial Maranhão Distribuidora de Energia S.A. (BVMF:EQMA3B) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 1.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Equatorial Maranhão Distribuidora de Energia has some staying power. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 20% of Equatorial Maranhão Distribuidora de Energia's profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 59% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Equatorial Maranhão Distribuidora de Energia has available to meet other needs. It's positive to see that Equatorial Maranhão Distribuidora de Energia's 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.

Remember, you can always get a snapshot of Equatorial Maranhão Distribuidora de Energia's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Equatorial Maranhão Distribuidora de Energia's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was R$0.4 in 2011, compared to R$0.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.6% a year over that time. Equatorial Maranhão Distribuidora de Energia's dividend payments have fluctuated, so it hasn't grown 8.6% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Equatorial Maranhão Distribuidora de Energia might have put its house in order since then, but we remain cautious.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Equatorial Maranhão Distribuidora de Energia has grown its earnings per share at 7.2% per annum over the past five years. A low payout ratio and strong historical earnings growth suggests Equatorial Maranhão Distribuidora de Energia has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.

Conclusion

To summarise, shareholders should always check that Equatorial Maranhão Distribuidora de Energia's 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 Equatorial Maranhão Distribuidora de Energia pays out a low fraction of its earnings and, while it paid a higher percentage of cashflow, this also was within a normal range. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Ultimately, Equatorial Maranhão Distribuidora de Energia comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 2 warning signs for Equatorial Maranhão Distribuidora de Energia that investors should take into consideration.

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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