Why It Might Not Make Sense To Buy Inversiones Aguas Metropolitanas S.A. (SNSE:IAM) For Its Upcoming Dividend

It looks like Inversiones Aguas Metropolitanas S.A. (SNSE:IAM) is about to go ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Accordingly, Inversiones Aguas Metropolitanas investors that purchase the stock on or after the 17th of May will not receive the dividend, which will be paid on the 23rd of May.

The company's next dividend payment will be CL$42.862 per share, and in the last 12 months, the company paid a total of CL$43.28 per share. Last year's total dividend payments show that Inversiones Aguas Metropolitanas has a trailing yield of 5.8% on the current share price of CL$750.17. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Inversiones Aguas Metropolitanas

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. Inversiones Aguas Metropolitanas paid out 70% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the past year it paid out 120% 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.

Inversiones Aguas Metropolitanas 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 Inversiones Aguas Metropolitanas 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 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Inversiones Aguas Metropolitanas's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Inversiones Aguas Metropolitanas has seen its dividend decline 2.8% per annum on average over the past 10 years, which is not great to see.

Final Takeaway

Should investors buy Inversiones Aguas Metropolitanas for the upcoming dividend? Earnings per share have not grown and Inversiones Aguas Metropolitanas's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. 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. To that end, you should learn about the 2 warning signs we've spotted with Inversiones Aguas Metropolitanas (including 1 which is a bit concerning).

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.