Don't Race Out To Buy Inversiones Aguas Metropolitanas S.A. (SNSE:IAM) Just Because It's Going Ex-Dividend

Readers hoping to buy Inversiones Aguas Metropolitanas S.A. (SNSE:IAM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Inversiones Aguas Metropolitanas' shares before the 10th of January to receive the dividend, which will be paid on the 15th of January.

The company's next dividend payment will be CL$19.3142 per share, and in the last 12 months, the company paid a total of CL$62.90 per share. Last year's total dividend payments show that Inversiones Aguas Metropolitanas has a trailing yield of 8.5% on the current share price of CL$744.31. If you buy this business for its dividend, you should have an idea of whether Inversiones Aguas Metropolitanas's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Inversiones Aguas Metropolitanas

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Inversiones Aguas Metropolitanas is paying out an acceptable 68% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Inversiones Aguas Metropolitanas generated enough free cash flow to afford its dividend. Over the past year it paid out 197% 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 Inversiones Aguas Metropolitanas'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 Inversiones Aguas Metropolitanas's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Inversiones Aguas Metropolitanas's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Inversiones Aguas Metropolitanas has lifted its dividend by approximately 0.9% a year on average.

To Sum It Up

Is Inversiones Aguas Metropolitanas worth buying for its dividend? It's not great to see earnings per share have been flat and that the company paid out an uncomfortably high percentage of its cash flow over the past year. Cash flows are typically more volatile than earnings, but this is still not what we like to see. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 Inversiones Aguas Metropolitanas. Our analysis shows 2 warning signs for Inversiones Aguas Metropolitanas that we strongly recommend you have a look at before investing in the company.

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.