It looks like Compañía Electro Metalúrgica S.A. (SNSE:ELECMETAL) is about to go ex-dividend in the next four 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. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, Compañía Electro Metalúrgica investors that purchase the stock on or after the 2nd of December will not receive the dividend, which will be paid on the 7th of December.
The company's next dividend payment will be CL$140 per share, on the back of last year when the company paid a total of CL$249 to shareholders. Based on the last year's worth of payments, Compañía Electro Metalúrgica has a trailing yield of 2.1% on the current stock price of CLP11900. 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 investigate whether Compañía Electro Metalúrgica can afford its dividend, and if the dividend could grow.
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. Compañía Electro Metalúrgica paid out 51% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out an unsustainably high 254% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Compañía Electro Metalúrgica intends to continue funding this dividend, or if it could be forced to cut the payment.
While Compañía Electro Metalúrgica'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 Compañía Electro Metalúrgica to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Compañía Electro Metalúrgica's earnings are down 3.7% a year over the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Compañía Electro Metalúrgica's dividend payments per share have declined at 2.0% per year on average over the past nine years, which is uninspiring.
Is Compañía Electro Metalúrgica an attractive dividend stock, or better left on the shelf? Compañía Electro Metalúrgica had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Compañía Electro Metalúrgica is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in Compañía Electro Metalúrgica despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 2 warning signs for Compañía Electro Metalúrgica you should know about.
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.
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.
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