We Wouldn't Be Too Quick To Buy Befesa S.A. (ETR:BFSA) Before It Goes Ex-Dividend

Readers hoping to buy Befesa S.A. (ETR:BFSA) 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. In other words, investors can purchase Befesa's shares before the 21st of June in order to be eligible for the dividend, which will be paid on the 25th of June.

The company's next dividend payment will be €0.73 per share. Last year, in total, the company distributed €0.73 to shareholders. Calculating the last year's worth of payments shows that Befesa has a trailing yield of 2.4% on the current share price of €30.32. If you buy this business for its dividend, you should have an idea of whether Befesa's dividend is reliable and sustainable. As a result, readers should always check whether Befesa has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Befesa

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Befesa paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Befesa generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 249% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While Befesa'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 Befesa's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Befesa's earnings per share have dropped 14% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Befesa's dividend payments are effectively flat on where they were six years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

Final Takeaway

Should investors buy Befesa for the upcoming dividend? Befesa had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Befesa as an investment, you'll find it beneficial to know what risks this stock is facing. To that end, you should learn about the 5 warning signs we've spotted with Befesa (including 1 which is a bit unpleasant).

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.

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.

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