Why It Might Not Make Sense To Buy MFE-Mediaforeurope N.V. (BIT:MFEB) For Its Upcoming Dividend

Readers hoping to buy MFE-Mediaforeurope N.V. (BIT:MFEB) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase MFE-Mediaforeurope's shares on or after the 23rd of June will not receive the dividend, which will be paid on the 25th of June.

The company's next dividend payment will be €0.27 per share, on the back of last year when the company paid a total of €0.27 to shareholders. Calculating the last year's worth of payments shows that MFE-Mediaforeurope has a trailing yield of 6.6% on the current share price of €4.07. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

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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, MFE-Mediaforeurope paid out 110% 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 flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 35% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while MFE-Mediaforeurope'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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Check out our latest analysis for MFE-Mediaforeurope

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see MFE-Mediaforeurope's earnings per share have dropped 18% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, MFE-Mediaforeurope has increased its dividend at approximately 10% 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. MFE-Mediaforeurope 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.

To Sum It Up

Should investors buy MFE-Mediaforeurope for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 110% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in MFE-Mediaforeurope'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.

With that in mind though, if the poor dividend characteristics of MFE-Mediaforeurope don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 1 warning sign for MFE-Mediaforeurope that we recommend you consider before investing in the business.

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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.