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

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Inversiones Aguas Metropolitanas S.A. (SNSE:IAM) is about to trade ex-dividend in the next 2 days. The ex-dividend date generally occurs two days 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Inversiones Aguas Metropolitanas' shares before the 28th of April to receive the dividend, which will be paid on the 2nd of May.

The company's upcoming dividend is CL$22.749 a share, following on from the last 12 months, when the company distributed a total of CL$62.18 per share to shareholders. Based on the last year's worth of payments, Inversiones Aguas Metropolitanas stock has a trailing yield of around 7.1% on the current share price of CL$878.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Inversiones Aguas Metropolitanas paid out 99% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. It paid out 90% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Inversiones Aguas Metropolitanas's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Check out our latest analysis for Inversiones Aguas Metropolitanas

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 with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that Inversiones Aguas Metropolitanas's earnings are down 3.6% a year over the past five years.

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 delivered 0.8% dividend growth per year on average over the past 10 years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Inversiones Aguas Metropolitanas? It's never fun to see a company's earnings per share in retreat. Additionally, Inversiones Aguas Metropolitanas is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Inversiones Aguas Metropolitanas and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 2 warning signs for Inversiones Aguas Metropolitanas 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.