Read This Before Considering Zona Franca de Iquique S.A. (SNSE:ZOFRI) For Its Upcoming CL$33.56 Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Zona Franca de Iquique S.A. (SNSE:ZOFRI) is about to trade ex-dividend in the next 3 days. The ex-dividend date is commonly two business days 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. Therefore, if you purchase Zona Franca de Iquique's shares on or after the 19th of May, you won't be eligible to receive the dividend, when it is paid on the 23rd of May.

The company's next dividend payment will be CL$33.56 per share, on the back of last year when the company paid a total of CL$67.12 to shareholders. Based on the last year's worth of payments, Zona Franca de Iquique stock has a trailing yield of around 6.8% on the current share price of CL$982.56. 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 check whether the dividend payments are covered, and if earnings are growing.

We've discovered 2 warning signs about Zona Franca de Iquique. View them for free.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 80% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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. Zona Franca de Iquique paid out more free cash flow than it generated - 180%, 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.

Zona Franca de Iquique does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Zona Franca de Iquique'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 Zona Franca de Iquique to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Check out our latest analysis for Zona Franca de Iquique

Click here to see how much of its profit Zona Franca de Iquique paid out over the last 12 months.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Zona Franca de Iquique earnings per share are up 9.1% per annum 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Zona Franca de Iquique has increased its dividend at approximately 6.7% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Zona Franca de Iquique for the upcoming dividend? Zona Franca de Iquique is paying out a reasonable percentage of its income and an uncomfortably high 180% of its cash flow as dividends. At least earnings per share have been growing steadily. Bottom line: Zona Franca de Iquique has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Zona Franca de Iquique as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 2 warning signs for Zona Franca de Iquique (1 doesn't sit too well with us) you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.