Income Investors Should Know That Empresa Eléctrica de Magallanes S.A. (SNSE:EDELMAG) Goes Ex-Dividend Soon

Empresa Eléctrica de Magallanes S.A. (SNSE:EDELMAG) stock is about to trade ex-dividend in 4 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Empresa Eléctrica de Magallanes investors that purchase the stock on or after the 13th of June will not receive the dividend, which will be paid on the 18th of June.

The company's next dividend payment will be CL$132.00 per share. Last year, in total, the company distributed CL$276 to shareholders. Based on the last year's worth of payments, Empresa Eléctrica de Magallanes stock has a trailing yield of around 5.4% on the current share price of CL$5100.00. 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 Empresa Eléctrica de Magallanes can afford its dividend, and if the dividend could grow.

See our latest analysis for Empresa Eléctrica de Magallanes

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. Empresa Eléctrica de Magallanes paid out a comfortable 46% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 92% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Empresa Eléctrica de Magallanes 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 Empresa Eléctrica de Magallanes 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 Empresa Eléctrica de Magallanes paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Empresa Eléctrica de Magallanes's earnings have been skyrocketing, up 22% per annum 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Empresa Eléctrica de Magallanes has seen its dividend decline 0.8% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Is Empresa Eléctrica de Magallanes worth buying for its dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. To summarise, Empresa Eléctrica de Magallanes looks okay on this analysis, although it doesn't appear a stand-out opportunity.

While it's tempting to invest in Empresa Eléctrica de Magallanes for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 3 warning signs with Empresa Eléctrica de Magallanes and understanding them should be part of your investment process.

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

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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.