It Might Not Be A Great Idea To Buy Gévelot SA (EPA:ALGEV) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Gévelot SA (EPA:ALGEV) is about to trade ex-dividend in the next three days. The ex-dividend date is usually set to be two business days 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 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. In other words, investors can purchase Gévelot's shares before the 18th of June in order to be eligible for the dividend, which will be paid on the 20th of June.

The company's next dividend payment will be €5.00 per share, on the back of last year when the company paid a total of €5.00 to shareholders. Based on the last year's worth of payments, Gévelot stock has a trailing yield of around 2.7% on the current share price of €183.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. Gévelot distributed an unsustainably high 114% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Gévelot 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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

See our latest analysis for Gévelot

Click here to see how much of its profit Gévelot paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Gévelot's earnings per share have dropped 17% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Gévelot has lifted its dividend by approximately 11% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Gévelot is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid Gévelot? Not only are earnings per share declining, but Gévelot is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Gévelot.

With that in mind though, if the poor dividend characteristics of Gévelot don't faze you, it's worth being mindful of the risks involved with this business. We've identified 2 warning signs with Gévelot (at least 1 which is concerning), and understanding them 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.