Read This Before Considering Sonda S.A. (SNSE:SONDA) For Its Upcoming CL$2.35804 Dividend

Sonda S.A. (SNSE:SONDA) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. 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 Sonda's shares before the 6th of September in order to be eligible for the dividend, which will be paid on the 11th of September.

The company's upcoming dividend is CL$2.35804 a share, following on from the last 12 months, when the company distributed a total of CL$21.90 per share to shareholders. Last year's total dividend payments show that Sonda has a trailing yield of 5.6% on the current share price of CL$393.89. If you buy this business for its dividend, you should have an idea of whether Sonda's dividend is reliable and sustainable. As a result, readers should always check whether Sonda has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Sonda

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. Sonda paid out a comfortable 38% of its profit last year. 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. Over the past year it paid out 157% 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.

While Sonda'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. Were this to happen repeatedly, this would be a risk to Sonda's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Sonda has grown its earnings rapidly, up 22% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Sonda has seen its dividend decline 5.4% per annum on average over the past 10 years, which is not great to see. Sonda is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Should investors buy Sonda for the upcoming dividend? We like that Sonda has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. To summarise, Sonda looks okay on this analysis, although it doesn't appear a stand-out opportunity.

On that note, you'll want to research what risks Sonda is facing. Case in point: We've spotted 3 warning signs for Sonda 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.