Here's Why We're Wary Of Buying Colas' (EPA:RE) For Its Upcoming Dividend

By
Simply Wall St
Published
April 28, 2021
ENXTPA:RE

Colas SA (EPA:RE) stock is about to trade ex-dividend in 3 days. If you purchase the stock on or after the 3rd of May, you won't be eligible to receive this dividend, when it is paid on the 5th of May.

Colas's upcoming dividend is €2.90 a share, following on from the last 12 months, when the company distributed a total of €2.90 per share to shareholders. Looking at the last 12 months of distributions, Colas has a trailing yield of approximately 2.4% on its current stock price of €122.5. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Colas

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. Last year, Colas paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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 distributed 30% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while Colas's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.

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

historic-dividend
ENXTPA:RE Historic Dividend April 29th 2021

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. With that in mind, we're discomforted by Colas's 17% per annum decline in earnings in 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. Colas has seen its dividend decline 7.5% per annum on average over the past 10 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.

The Bottom Line

Should investors buy Colas for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 101% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Colas's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. 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 Colas and want to know more, you'll find it very useful to know what risks this stock faces. For example, Colas has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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