Here's Why We're Wary Of Buying Compañía Electro Metalúrgica's (SNSE:ELECMETAL) For Its Upcoming Dividend

Compañía Electro Metalúrgica S.A. (SNSE:ELECMETAL) is about to trade ex-dividend in the next three days. You will need to purchase shares before the 14th of December to receive the dividend, which will be paid on the 18th of December.

Compañía Electro Metalúrgica's next dividend payment will be CL$102 per share, on the back of last year when the company paid a total of CL$296 to shareholders. Based on the last year's worth of payments, Compañía Electro Metalúrgica stock has a trailing yield of around 2.7% on the current share price of CLP11100. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Compañía Electro Metalúrgica can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Compañía Electro Metalúrgica

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. Compañía Electro Metalúrgica is paying out just 12% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Compañía Electro Metalúrgica paid out more free cash flow than it generated - 138%, to be precise - last year, which we think is concerningly 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.

Compañía Electro Metalúrgica paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the 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.

Click here to see how much of its profit Compañía Electro Metalúrgica paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Compañía Electro Metalúrgica's earnings per share have dropped 7.8% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Compañía Electro Metalúrgica's dividend payments are broadly unchanged compared to where they were eight years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Final Takeaway

From a dividend perspective, should investors buy or avoid Compañía Electro Metalúrgica? Compañía Electro Metalúrgica's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Compañía Electro Metalúrgica.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Compañía Electro Metalúrgica. Be aware that Compañía Electro Metalúrgica is showing 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

If you're in the market for dividend stocks, we recommend checking our list of top 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.
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