Read This Before Considering Sacyr, S.A. (BME:SCYR) For Its Upcoming €0.03645 Dividend

Readers hoping to buy Sacyr, S.A. (BME:SCYR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible 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. This means that investors who purchase Sacyr's shares on or after the 27th of June will not receive the dividend, which will be paid on the 1st of July.

The company's next dividend payment will be €0.03645 per share, on the back of last year when the company paid a total of €0.16 to shareholders. Calculating the last year's worth of payments shows that Sacyr has a trailing yield of 4.5% on the current share price of €3.472. If you buy this business for its dividend, you should have an idea of whether Sacyr's dividend is reliable and sustainable. As a result, readers should always check whether Sacyr has been able to grow its dividends, or if the dividend might be cut.

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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. Sacyr paid out 102% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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 good news is it paid out just 4.3% of its free cash flow in the last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Sacyr fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

View our latest analysis for Sacyr

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

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. It's encouraging to see Sacyr has grown its earnings rapidly, up 31% a year for the past five years.

We'd also point out that Sacyr issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Sacyr has lifted its dividend by approximately 4.9% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Sacyr is keeping back more of its profits to grow the business.

To Sum It Up

Should investors buy Sacyr for the upcoming dividend? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Sacyr's paying out such a high percentage of its profit. In summary, it's hard to get excited about Sacyr from a dividend perspective.

While it's tempting to invest in Sacyr for the dividends alone, you should always be mindful of the risks involved. We've identified 2 warning signs with Sacyr (at least 1 which is potentially serious), and understanding these should be part of your investment process.

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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.