Equatorial Pará Distribuidora de Energia S.A. (BVMF:EQPA3) is about to trade ex-dividend in the next 2 days. You will need to purchase shares before the 1st of June to receive the dividend, which will be paid on the 31st of December.
The upcoming dividend for Equatorial Pará Distribuidora de Energia is R$0.08 per share, increased from last year’s total dividends per share of R$0.04. 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! That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Equatorial Pará Distribuidora de Energia paid out just 19% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. Dividends consumed 65% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Equatorial Pará Distribuidora de Energia earnings per share are up 3.2% per annum over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company’s prospects for future growth.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Equatorial Pará Distribuidora de Energia’s dividend payments per share have declined at 19% per year on average over the past nine years, which is uninspiring. Equatorial Pará Distribuidora de Energia is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It’s unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
Should investors buy Equatorial Pará Distribuidora de Energia for the upcoming dividend? Earnings per share have been growing at a steady rate, and Equatorial Pará Distribuidora de Energia paid out less than half its profits and more than half its free cash flow as dividends over the last year. Overall we’re not hugely bearish on the stock, but there are likely better dividend investments out there.
On that note, you’ll want to research what risks Equatorial Pará Distribuidora de Energia is facing. To that end, you should learn about the 4 warning signs we’ve spotted with Equatorial Pará Distribuidora de Energia (including 1 which is a bit concerning).
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. Thank you for reading.