Don't Buy Línea Directa Aseguradora, S.A., Compañía de Seguros y Reaseguros (BME:LDA) For Its Next Dividend Without Doing These Checks

It looks like Línea Directa Aseguradora, S.A., Compañía de Seguros y Reaseguros (BME:LDA) is about to go ex-dividend in the next two 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Línea Directa Aseguradora Compañía de Seguros y Reaseguros investors that purchase the stock on or after the 30th of July will not receive the dividend, which will be paid on the 1st of August.

The company's upcoming dividend is €0.0111638 a share, following on from the last 12 months, when the company distributed a total of €0.049 per share to shareholders. Looking at the last 12 months of distributions, Línea Directa Aseguradora Compañía de Seguros y Reaseguros has a trailing yield of approximately 4.2% on its current stock price of €1.146. If you buy this business for its dividend, you should have an idea of whether Línea Directa Aseguradora Compañía de Seguros y Reaseguros's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Línea Directa Aseguradora Compañía de Seguros y Reaseguros

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. Línea Directa Aseguradora Compañía de Seguros y Reaseguros reported a loss last year, so it's not great to see that it has continued paying a dividend.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Línea Directa Aseguradora Compañía de Seguros y Reaseguros's earnings per share have dropped 21% 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. Línea Directa Aseguradora Compañía de Seguros y Reaseguros has seen its dividend decline 21% per annum on average over the past three years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Has Línea Directa Aseguradora Compañía de Seguros y Reaseguros got what it takes to maintain its dividend payments? Earnings per share are in decline and Línea Directa Aseguradora Compañía de Seguros y Reaseguros is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

So if you're still interested in Línea Directa Aseguradora Compañía de Seguros y Reaseguros despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 1 warning sign for Línea Directa Aseguradora Compañía de Seguros y Reaseguros you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.

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