Is Compañía Chilena de Fósforos S.A. (SNSE:FOSFOROS) A Strong Dividend Stock?

Could Compañía Chilena de Fósforos S.A. (SNSE:FOSFOROS) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With Compañía Chilena de Fósforos yielding 3.6% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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. In the last year, Compañía Chilena de Fósforos paid out 137% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, Compañía Chilena de Fósforos paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

While the above analysis focuses on dividends relative to a company's earnings, we do note Compañía Chilena de Fósforos' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Compañía Chilena de Fósforos' latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Compañía Chilena de Fósforos has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was CL$115 in 2011, compared to CL$36.0 last year. The dividend has fallen 69% over that period.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Over the past five years, it looks as though Compañía Chilena de Fósforos' EPS have declined at around 24% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Compañía Chilena de Fósforos' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Compañía Chilena de Fósforos' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Earnings per share are down, and Compañía Chilena de Fósforos' dividend has been cut at least once in the past, which is disappointing. In this analysis, Compañía Chilena de Fósforos doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 4 warning signs for Compañía Chilena de Fósforos (1 is a bit concerning!) that you should be aware of before investing.

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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