Are Dividend Investors Making A Mistake With Corporación Financiera Alba, S.A. (BME:ALB)?

Is Corporación Financiera Alba, S.A. (BME:ALB) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A slim 2.3% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Corporación Financiera Alba could have potential. There are a few simple ways to reduce the risks of buying Corporación Financiera Alba for its dividend, and we'll go through these below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, Corporación Financiera Alba currently pays a dividend. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

Consider getting our latest analysis on Corporación Financiera Alba's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Corporación Financiera Alba has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. Its most recent annual dividend was €1.0 per share, effectively flat on its first payment 10 years ago.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Corporación Financiera Alba's earnings per share have shrunk at 33% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Corporación Financiera Alba's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, it's not great to see a dividend being paid despite the company being unprofitable over the last year. Earnings per share are down, and Corporación Financiera Alba's dividend has been cut at least once in the past, which is disappointing. With any dividend stock, we look for a sustainable payout ratio, steady dividends, and growing earnings. Corporación Financiera Alba has a few too many issues for us to get interested.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Corporación Financiera Alba that you should be aware of before investing.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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This article by Simply Wall St is general in nature. 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.
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