Don't Buy Gestamp Automoción, S.A. (BME:GEST) For Its Next Dividend Without Doing These Checks

Gestamp Automoción, S.A. (BME:GEST) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase Gestamp Automoción's shares before the 1st of July to receive the dividend, which will be paid on the 3rd of July.

The company's upcoming dividend is €0.062613 a share, following on from the last 12 months, when the company distributed a total of €0.15 per share to shareholders. Based on the last year's worth of payments, Gestamp Automoción has a trailing yield of 5.4% on the current stock price of €2.73. If you buy this business for its dividend, you should have an idea of whether Gestamp Automoción's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Gestamp Automoción

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. Gestamp Automoción paid out a comfortable 30% of its profit last year. A useful secondary check can be to evaluate whether Gestamp Automoción generated enough free cash flow to afford its dividend. The company paid out 101% 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.

While Gestamp Automoción'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 Gestamp Automoción'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?

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. With that in mind, we're not enthused to see that Gestamp Automoción's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Gestamp Automoción has delivered an average of 2.8% per year annual increase in its dividend, based on the past six years of dividend payments.

Final Takeaway

From a dividend perspective, should investors buy or avoid Gestamp Automoción? It's disappointing to see earnings per share have fallen slightly, even though Gestamp Automoción is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Gestamp Automoción despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, Gestamp Automoción has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.

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