It Might Not Be A Great Idea To Buy Transmissora Aliança de Energia Elétrica S.A. (BVMF:TAEE11) For Its Next Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Transmissora Aliança de Energia Elétrica S.A. (BVMF:TAEE11) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Transmissora Aliança de Energia Elétrica's shares before the 6th of May in order to be eligible for the dividend, which will be paid on the 16th of May.

The company's next dividend payment will be R$1.1329017 per share. Last year, in total, the company distributed R$2.17 to shareholders. Based on the last year's worth of payments, Transmissora Aliança de Energia Elétrica has a trailing yield of 6.1% on the current stock price of R$35.22. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Transmissora Aliança de Energia Elétrica

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Transmissora Aliança de Energia Elétrica paid out 55% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Transmissora Aliança de Energia Elétrica generated enough free cash flow to afford its dividend. Over the past year it paid out 147% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Transmissora Aliança de Energia Elétrica paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Transmissora Aliança de Energia Elétrica's ability to maintain its dividend.

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. With that in mind, we're encouraged by the steady growth at Transmissora Aliança de Energia Elétrica, with earnings per share up 5.0% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Transmissora Aliança de Energia Elétrica has seen its dividend decline 0.7% per annum on average over the past 10 years, which is not great to see.

Final Takeaway

From a dividend perspective, should investors buy or avoid Transmissora Aliança de Energia Elétrica? Transmissora Aliança de Energia Elétrica is paying out a reasonable percentage of its income and an uncomfortably high 147% of its cash flow as dividends. At least earnings per share have been growing steadily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Transmissora Aliança de Energia Elétrica.

So if you're still interested in Transmissora Aliança de Energia Elétrica despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 3 warning signs for Transmissora Aliança de Energia Elétrica (2 are concerning!) that deserve your attention before investing in the shares.

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.