We Wouldn't Be Too Quick To Buy Prosegur Compañía de Seguridad, S.A. (BME:PSG) Before It Goes Ex-Dividend

Readers hoping to buy Prosegur Compañía de Seguridad, S.A. (BME:PSG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Prosegur Compañía de Seguridad's shares on or after the 26th of April will not receive the dividend, which will be paid on the 28th of April.

The company's upcoming dividend is €0.025 a share, following on from the last 12 months, when the company distributed a total of €0.12 per share to shareholders. Looking at the last 12 months of distributions, Prosegur Compañía de Seguridad has a trailing yield of approximately 6.2% on its current stock price of €2. If you buy this business for its dividend, you should have an idea of whether Prosegur Compañía de Seguridad's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Prosegur Compañía de Seguridad

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. Prosegur Compañía de Seguridad distributed an unsustainably high 163% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Prosegur Compañía de Seguridad generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 43% of the free cash flow it generated, which is a comfortable payout ratio.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Prosegur Compañía de Seguridad fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Prosegur Compañía de Seguridad's earnings per share have dropped 19% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

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, Prosegur Compañía de Seguridad has lifted its dividend by approximately 2.0% a year on average.

Final Takeaway

From a dividend perspective, should investors buy or avoid Prosegur Compañía de Seguridad? It's not a great combination to see a company with earnings in decline and paying out 163% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Prosegur Compañía de Seguridad and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 3 warning signs for Prosegur Compañía de Seguridad that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.