Don't Buy Empresa Eléctrica Pehuenche S.A. (SNSE:PEHUENCHE) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Empresa Eléctrica Pehuenche S.A. (SNSE:PEHUENCHE) is about to go ex-dividend in just three 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 as the process of settlement involves at least 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 Empresa Eléctrica Pehuenche's shares before the 20th of October to receive the dividend, which will be paid on the 24th of October.

The company's next dividend payment will be US$0.0861563 per share, on the back of last year when the company paid a total of US$0.27 to shareholders. Based on the last year's worth of payments, Empresa Eléctrica Pehuenche has a trailing yield of 8.8% on the current stock price of CL$2947.10. If you buy this business for its dividend, you should have an idea of whether Empresa Eléctrica Pehuenche's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are 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. Empresa Eléctrica Pehuenche paid out more than half (67%) of its earnings last year, which is a regular payout ratio for most companies. 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 105% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

While Empresa Eléctrica Pehuenche'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. Cash is king, as they say, and were Empresa Eléctrica Pehuenche to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Check out our latest analysis for Empresa Eléctrica Pehuenche

Click here to see how much of its profit Empresa Eléctrica Pehuenche 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. With that in mind, we're encouraged by the steady growth at Empresa Eléctrica Pehuenche, with earnings per share up 6.0% on average over the last five years. Earnings have been growing at a steady rate, 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 Pehuenche has seen its dividend decline 2.0% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Should investors buy Empresa Eléctrica Pehuenche for the upcoming dividend? Earnings per share have grown somewhat, although Empresa Eléctrica Pehuenche paid out over half its profits and the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Empresa Eléctrica Pehuenche.

With that in mind though, if the poor dividend characteristics of Empresa Eléctrica Pehuenche don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 1 warning sign for Empresa Eléctrica Pehuenche that we recommend you consider before investing in the business.

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.