Here's Why We're Wary Of Buying Empresa Eléctrica Pehuenche's (SNSE:PEHUENCHE) For Its Upcoming Dividend

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 3 days. The ex-dividend date is commonly two business days 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 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. Thus, you can purchase Empresa Eléctrica Pehuenche's shares before the 19th of May in order to receive the dividend, which the company will pay on the 23rd of May.

The company's upcoming dividend is CL$98.153826 a share, following on from the last 12 months, when the company distributed a total of CL$255 per share to shareholders. Looking at the last 12 months of distributions, Empresa Eléctrica Pehuenche has a trailing yield of approximately 9.3% on its current stock price of CL$2850.00. 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.

Our free stock report includes 1 warning sign investors should be aware of before investing in Empresa Eléctrica Pehuenche. Read for free now.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Empresa Eléctrica Pehuenche paid out 100% 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. The company paid out 100% 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.

Cash is slightly more important than profit from a dividend perspective, but given Empresa Eléctrica Pehuenche's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

View 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?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Empresa Eléctrica Pehuenche's earnings per share have risen 14% per annum over the last five years. We're a bit put out by the fact that Empresa Eléctrica Pehuenche paid out virtually all of its earnings and cashflow as dividends over the last year. Earnings are growing at a decent clip, so this payout ratio may prove sustainable, but it's not great to see.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Empresa Eléctrica Pehuenche has lifted its dividend by approximately 2.2% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

The Bottom Line

Is Empresa Eléctrica Pehuenche an attractive dividend stock, or better left on the shelf? While it's nice to see earnings per share growing, we're curious about how Empresa Eléctrica Pehuenche intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. 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 Empresa Eléctrica Pehuenche. Our analysis shows 1 warning sign for Empresa Eléctrica Pehuenche and you should be aware of this before buying any shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.